How I Use Longer Time Frames in Short-Term Trading

12/21/2010 12:01 am EST

Focus: STRATEGIES

Steven Spencer

Partner, SMB Capital

The concept of a higher (or longer) time frame can have a positive impact on your trading results. In other words, whichever time frame you are observing price action to make a trading decision, you should consider a longer time frame in order to assist you. In my experience, you can increase your win rate if you make trades in the direction of the next highest time frame. For example, if you are basing a trading decision on a trend that has been established with five-minute bars, then you should pay attention if this trade lines up well with 30-minute bars.

Take a look at the following examples. One in Las Vegas Sands (LVS) that had an explosive move on a lower time frame, but unfortunately was running up against the downtrend on a higher time frame. The trade failed on the lower time frame and continued lower over the next few days in line with the higher time frame.  The second trade was in Edwards Life Sciences (EW), which was moving higher on several higher time frames, and when it made a strong intraday move on the five-minute time frame, it trended up powerfully for the rest of the day.

chart
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chart
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I will take trades on lower time frames that don’t match up with higher time frames if the risk/reward makes sense. This is usually the case if the higher time frame support/resistance is far enough from where the lower time frame trade begins. But I am most comfortable and most aggressive when two or more time frames line up.

By Steve Spencer, trader, SMB Capital

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