Spot The Trend & Trade It On Lower Time Frames
One of the strongest setups are the ones that are being formed by the dual time frame momentum. By using multiple time frames you will be able to create a high probability setup. Key rule is: Large/High time frame for trend and Small/Low time frame for your entry. Personally I mostly I like to hold short term positions, so I use the daily time frame for the trend and then the 4 hour for my entry.
For the purpose of this educational post I will use the weekly time frame so that we can spot the long term trend and over the course of the next 2-3 months I will update this post and you will see how very well this strategy works (for the purpose of this guide I will assume it has broken the upper range, so it isn't a trading advice or prediction of what will happen)
Part 1
Spot The Trend
(I use the weekly time frame, but you can apply the same principles to the daily time frame)
Currently the weekly time frame is trading in a nice triangle that is narrowing. At the moment it isn't possible to spot a clear trend due to this. So we have some patience and we will wait till the price has broken out of the triangle. Now it's important to remember that a range is only considered to be broken when the candle has closed outside of it. Since we now use the weekly candle we wait till the market close on Friday, if you use the daily time frame you wait till the daily close of the market which will close the current candle and start a new one.
Lets jump a bit forward in time and assume the upper range has broken when the weekly candle closed. Now we know that the weekly time frame will show a nice wave up as is often the case with a range break out. So there we have had, we had some patience, we waited till the weekly would close outside of the range and now we know that the weekly time frame trend will be up the next weeks.
Now this doesn't mean straight away that on Monday the next trading day the price will jump up. Maybe the lower time frame will have a correction first because it just had a strong wave up. An indication of this on the weekly time frame can be the Stoch Rsi, Rsi or just Stoch indicator. If the price has broken out of the range but one of these indicators is already in the overbought or oversold area a retracement can be very likely. To confirm this we take a look at the lower time frames, because we want to make sure that your buy position wont drown first be a retracement on the 4 hour or daily time frame before going back up and following the weekly trend. This is the next step.
Find Your Entry
To avoid getting caught up in a lower time frame is very simple. You make sure that the lower time frame is pointing up in the same direction as the higher time frame. For example I use the daily for the trend and then I wait till the 4 hour points in the same direction as the daily trend and I have my entry. In our example it goes the same. Except now we use the daily and 4 hour time frames for our entry.
Why not only the daily? If the daily points like the weekly time frame, you can still get caught up in the 4 hour retracement.
Why not skip the daily and jump to the 4 hourWell if the 4 hour points up like the weekly time frame in our example,the daily time frame can still point down. So basically you're trading a retracement of a retracement. Which can make your position go up first based on the 4 hour, but once that retracement is done it will go down first till the retracement on the daily time frame is done.
To avoid getting caught up in all these retracements we wait till the daily and 4 hour time frames will both point in the same direction as the weekly. Which will be up in our example since we assumed that the upper range has been broken.
The following situation can indicate that the daily or 4 hour time frame are going up:
For the purpose of this educational post I will use the weekly time frame so that we can spot the long term trend and over the course of the next 2-3 months I will update this post and you will see how very well this strategy works (for the purpose of this guide I will assume it has broken the upper range, so it isn't a trading advice or prediction of what will happen)
Part 1
Spot The Trend
(I use the weekly time frame, but you can apply the same principles to the daily time frame)
Currently the weekly time frame is trading in a nice triangle that is narrowing. At the moment it isn't possible to spot a clear trend due to this. So we have some patience and we will wait till the price has broken out of the triangle. Now it's important to remember that a range is only considered to be broken when the candle has closed outside of it. Since we now use the weekly candle we wait till the market close on Friday, if you use the daily time frame you wait till the daily close of the market which will close the current candle and start a new one.
Lets jump a bit forward in time and assume the upper range has broken when the weekly candle closed. Now we know that the weekly time frame will show a nice wave up as is often the case with a range break out. So there we have had, we had some patience, we waited till the weekly would close outside of the range and now we know that the weekly time frame trend will be up the next weeks.
Now this doesn't mean straight away that on Monday the next trading day the price will jump up. Maybe the lower time frame will have a correction first because it just had a strong wave up. An indication of this on the weekly time frame can be the Stoch Rsi, Rsi or just Stoch indicator. If the price has broken out of the range but one of these indicators is already in the overbought or oversold area a retracement can be very likely. To confirm this we take a look at the lower time frames, because we want to make sure that your buy position wont drown first be a retracement on the 4 hour or daily time frame before going back up and following the weekly trend. This is the next step.
Find Your Entry
To avoid getting caught up in a lower time frame is very simple. You make sure that the lower time frame is pointing up in the same direction as the higher time frame. For example I use the daily for the trend and then I wait till the 4 hour points in the same direction as the daily trend and I have my entry. In our example it goes the same. Except now we use the daily and 4 hour time frames for our entry.
Why not only the daily? If the daily points like the weekly time frame, you can still get caught up in the 4 hour retracement.
Why not skip the daily and jump to the 4 hourWell if the 4 hour points up like the weekly time frame in our example,the daily time frame can still point down. So basically you're trading a retracement of a retracement. Which can make your position go up first based on the 4 hour, but once that retracement is done it will go down first till the retracement on the daily time frame is done.
To avoid getting caught up in all these retracements we wait till the daily and 4 hour time frames will both point in the same direction as the weekly. Which will be up in our example since we assumed that the upper range has been broken.
The following situation can indicate that the daily or 4 hour time frame are going up:
- Range has been broken to the upside
- Price has touched the lower range and the Stoch Rsi, Rsi, Stoch indicator made a bullish cross over
Comment:
Short update, here above you see the 4 hour time frame.
If you click play on this weekly time frame idea you see that the price has broken out of the upper range and continued to move up like predicted.
At the same time as that break out there was this setup on the 4 hour time frame that was also bullish. Now when you also click play on this idea you see that it worked out perfectly and its now up to 114.20!!
Short update, here above you see the 4 hour time frame.
If you click play on this weekly time frame idea you see that the price has broken out of the upper range and continued to move up like predicted.
At the same time as that break out there was this setup on the 4 hour time frame that was also bullish. Now when you also click play on this idea you see that it worked out perfectly and its now up to 114.20!!
Part 2
So we wait till the above mentioned situations apply to the daily and 4 hour time frame. Because when it does it will align with the uptrend of the weekly time frame. Generally the daily will show it first and then a bit after it the 4 hour, but if you're lucky they will show it at the same time.
So now in our example of the weekly time frame breaking the upper range, we have the weekly pointing up and one of the 2 previous mentioned options apply to the daily and 4 hour time frame. This is our moment to take the buy trade!
This weekly trend could go up to the previous weekly high at 118 and possibly breaking it. 675 pips at least. That's a nice run up. Of course this run up will also see retracements on all 3 time frames. But since we waited till the daily and 4 hour align with the weekly, the chances are very small that they will retrace right at our entry and drowning our position. So we have entered with a high probability setup.
Now this was all hypothetical and we assume an upper range break out (All though it's purely hypothetical an upper range break out is in fact very likely. You can see that it used to make lower high and higher lows but just recently that switched into higher highs and lower lows. A nice reversal sign)
For the next 2-3 months I will update this and we will follow the weekly trend for the real breakout and then we will follow the daily and 4 hour to find our entry. After that you will see how far this will go up.
Of course this takes a while since we use the weekly. I did this because it really shows the power of a large time frame trend. For intraday or intraweek trading you can use the daily for the trend and 4 hour for your entry applying the same principles as mentioned in this post.