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Use Multiple
two-thirds of the way forward from the mast or flagpole) and that the price move is usually about the distance of the flat side of the pennant, one way or the other.
In other words, on a five-minute price chart, if you suspect a pennant is forming, it will take you about two to three hours to define it, and somewhere around the four-hour mark a breakout higher or lower is a higher probability. Additionally, most pennants on a five-minute price chart have a flat side of some amount that is a certain percent of the day’s range. Armed with this data you now enter that trade, and if all goes smoothly, you might capture 80% or more of the breakout when it comes.
But at that moment, a new level of order flow comes in and that market really takes off. And identifying that new net order flow is what makes all the difference.
Using that hypothetical trade as an illustration, if you compare your five-minute price chart to an hourly time frame price chart, perhaps you will then observe a different pattern that the last 40 to 60 bars have cre- ated. Upon closer examination you note that the pennant formation that required 60 bars and 300 minutes by the clock is reflected on the hourly price chart as a double-topformation that required 6 bars and 300 min- utes by the clock. If your five-minute pennant formation had an upside breakout, once your price objective was reached, that most likely was near the top of the hourly double-top formation. Should the market now attract enough buying to penetrate the hourly double-top, you would be out of the trade with a small profit just when the larger-time-frame trader is buying into the market and creating a bigger order imbalance on the buy side. You have banked a small profit when you could have just as easily had a larger one by simply noting that the smaller-time- frame bullish potential was contained within a larger-time-frame bullish potential. Both time frames had a bullish potential that developed within the same 300 minutes by the clock, even though each price chart counted it differently and presented that data to the observer (you) in two different formats.
The concept of using multiple time frames has to do with understand- ing who is looking at what, and when those traders are most likely to add pressure to the order flow by entering an order. An hourly-based trader is thinking something different, and therefore executing differently, than someone on a longer or shorter time frame. When you have a lot of evi- dence on your side, in your time frame, that it is time to enter the market from one particular side, how confident are you that more orders from a different time frame will also be coming in from that side? You can de- velop that confidence by seeing objectively what other time frames are seeing. When you then compare those viewpoints for congruency, if you have a good sense that more than one time frame is thinking along the
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same lines, you have more confirmation that potential net order flow may develop a little larger along that direction. To help you let your profits run, you need to recognize and exploit what everytime frame might eventually be doing.
Your best trades occur when you have correctly positioned yourself on the net order flow as traders in each successively higher time frame choose to execute. For example, if you are looking for a buy point, you would like to see the 5-minute, 10-minute, and 15-minute price charts pro- vide similar clues, all at around the same price area. At the exact same time, the 30-minute and hourly price charts are likely neutral or slightly bearish after a move to the downside has already happened. The daily and weekly price charts might show a down day or weekly low within a broader weekly or monthly established range.
Now, suppose you execute from the buy side and within 30 minutes or so you have an open-trade profit. Most likely you have correctly identified where the 30-minute-or-less trader is creating a buy-side order imbalance because prices are higher. That can’t happen unless sellers are over- whelmed under those conditions at that moment. If the 30-minute and hourly bars now trade higher, then you have a pretty good clue that traders in the next higher time frame are also beginning to show up on the buy side. If the market now continues higher and closes, say, in the upper half of the daily range, it is a fairly good bet that the daily-time-frame buyer is also executing. If the market is again higher for the next day’s trading by the close, the traders looking for a potential low for the week may be active from the buy side. Your original entry on the shorter time frame is confirmed by the longer-time-frame traders executing from the same side. More traders are seeing the same thing, and the cumulative net order flow is working from that side. In this illustration, competing time frames became congruent as the market drew in the full spectrum of par- ticipants the more clock time passed. As time goes on, the market will continue to advance even when the short-term time frame produces a sell signal because the larger time frame is still attracting order flow from the buy side.
Now, bear in mind, I am not trying to oversimplify price action or get- ting positioned. I know that swings in price can be violent, the market might go sideways for a long time, and false signals frequently occur all the time. Often trades that could have worked become losers for various reasons. It takes time to get in a position, and it takes experience to know when the move you are waiting for is developing.
The point I want you to absorb is that certain trades from one side de- velop potential over time. Sometimes closing out your position with a good gain because it was one of the biggest moves you had ever seen un- der your time frame is the worst thing you can do. If the larger-time-frame
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traders are drawn in from the same side, that particular market will have a lot farther to go in your original direction. Of course, you can always get back in from the original side anytime you want, and maybe it is a good rule for you personally to remain flat overnight; but if you are following this rule properly you will always look for clues that the winning position you just found and participated in has a lot more potential developing in the same direction.
It takes clock timefor all those trading time frames to become active.
If traders in multiple time frames are coming into the market, your proba- bility of success is much better. When this rule is combined with Rule #11, you have a powerful tool to help you let profits run better. When a position has worked, consider that if it is still working a day or two later, you might want to look at that side again and also add to it.
Making this rule work for you requires you to think outside the box as it concerns your personal time frame. You should always have a time frame that you execute under, but that time frame does not contain all the information about potential net order flow. The wise trader will consider what the traders with other time frames might be seeing, because at some point, when those other time frames are drawn in, their orders from those different time frames will either add to the net order flow that is develop- ing in one direction or it will overwhelm the net order flow from the other side, stopping the imbalance and the price advance. Every trader who has the potential to execute will affect the net order flow. Whether those traders are using a larger or smaller time frame than you is not important.
What is important is whether the potential they offer will be for or against the net order flow currently operating in the market. In other words, if they come in with their potential, will that potential increase the imbal- ance or reduce it?
By observing price patterns in several time frames, you can begin to see which direction the market is more likely to go. By using more than one time frame to evaluate a trade’s potential, you will avoid more low- probability trades. When several time frames are all saying about the same thing and prices are advancing in that direction, as clock time passes, that trade’s potential is increasing. If several time frames appear to offer con- flicting price pattern relationships, that trade most likely has a lower po- tential. As a trader looking for high-probability trades, develop the skill of comparing multiple time frames to your trade hypothesis. When you have a good idea that traders in the next few higher time frames are interested in the same side as you are, you need to let them have the clock time they need to execute.
Also, be prepared for your time frame to give a liquidation signal when the higher time frames are getting their initiation signal. A key to holding your winners and using multiple time frames is learning that a
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shorter time frame needsto offer a countertrend signal to encourage the trader from the opposite side to initiate. That opposite-side order from the shorter-time-frame trader is what the higher-time-frame trader needs to execute his initiation order. For example, if you are on the 15-minute time frame from the buy side, and the hourly trader is nearing a buy signal, the hourly trader would like to see a sell signal on the 15-minute time frame in order to encourage a new 15-minute time frame short to open that he can buy from. Without knowing that the shorter time frame will be in conflict with the larger time frame at the exact moment the larger time frame is set to come in on the advancing side of the net order flow, you might be tempted to book a small gain in your time frame. Learn to let the larger time frames push your trade.
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