Using multiple time frames for trading stocks is useful to improve the efficiency of your trading strategy. We see the major trend using a higher time frame than what we intend to use and a lower time frame to enter a trade.
Suppose if we want to trade using the daily charts. We take the weekly charts to see the major trend. Suppose it’s an uptrend in a weekly chart we will tend to trade only long positions. We will use entries in the daily charts to enter long positions only. When sell signals are generated we will just exit our long positions. I.e. we don’t short sell.
And suppose if it’s a downtrend in a Weekly chart? We will tend to trade only short positions. We will use entries in the daily charts to enter short positions only. When buy signals are generated we will just exit our short positions. I.e. we don’t enter long positions.
Now that we are using two timeframes, it becomes essential for timing the entry of trades or adding additional positions. (Pyramiding). Further we can use an hourly chart to time our entries. Suppose the weekly & daily charts are in an uptrend, we will enter a long position or an additional long position when an hourly chart gives us a buy signal. Suppose the weekly & daily charts are in a downtrend. We will enter a short position or an additional short position when an hourly chart gives us a sell signal. This timeframe would not be used to exit the trades. It’s solely to improve the timing for entry. For exits we would use the signals generated in the daily charts.
We take three charts of the same security. First is the weekly chart, next chart is the daily chart and the last one is the hourly chart.
So let’s begin by taking the daily chart to trade. We check the weekly chart for the weekly trend. Lest assume the weekly trend is up. So, based on this information we will just trade long positions in the daily chart.
We look for a buy opportunity in the daily chart or we can see the hourly chart to enter a long position.
Now for entering additional positions we use buy opportunities in the hourly chart. We would exit based on the daily chart only, because we were trading based on the daily chart.
Similarly we can trade short when weekly charts are in a downtrend and daily chart generates sell opportunity. Additional positions are entered whenever sell opportunities are generated on the hourly charts.
For day trading we can use the hourly, 15 minutes and 5 minutes charts. Here we trade the 15 minutes chart. Or we can use 15 minutes, 5 minutes and 3 minutes charts. Here we trade the 5 minutes chart.