Trading on Multiple Time Frames
03/28/2012 3:30 pm EST
Traders can get valuable confirmation signals whenever a trend is evident in multiple time frames, explains Robert Miner, and the analysis process is simple and works well in any market.
We’re taking a look at multiple-time-frame strategies with Robert Miner. Bob, how can I use multiple time frames to my trading benefit?
Well you can use it with any market and any time frame, whether it is stocks, futures, or forex, and whether you’re looking at weekly or daily data, or 15-minute and 5-minute data, the approach is the same for all markets and all time frames, and it’s a really simple concept.
If you have a higher-degree trend—and let’s just use weekly and daily data to begin with and we’ll say the higher degree time frame is weekly—if a higher-degree momentum is bullish, then we want to look down to the daily momentum and look for bullish reversals in the daily momentum.
We then have two time frames with momentum in the same direction. That gives us a high probability that the trend is going to continue, and in this case, it would be a bullish, or positive, direction.
And how do you manage risk with this strategy?
I like the term “capital exposure” better than “risk” because risk is the probability of an event happening and capital exposure is the money out of your pocket.
Yes, how much am I going to lose?
That’s exactly it. How much can I lose if I’m wrong.
We usually have a very small distance in price between where the smaller time frame momentum made a reversal in the direction of the longer time frame. So, as I teach, once we’ve identified these dual and even triple time frame momentum set-ups, our entry strategy is 100% objective.
We do a trailing one-bar high, and if the market happens to go up and take out the one-bar high and put us in the trade, our stop is just one tick below the little swing low that happened before we entered the trade.
We usually only have a capital exposure of a few points in the S&P. I trade the S&P mostly, and if we’re knocked out of the trade, it’s a relatively small loss, and if that—in this case—weekly momentum kept going, we have a relatively large gain.
So, the whole key—and this is for whatever trading plan you would use—is that the losses are relatively small and the profits are relatively large, so you can suffer several losses to get on the right side of a higher-time-frame trend, which hopefully is going to make up for that
That’s the same for whatever trading plan, whether it’s mine or somebody else’s.
Bob, why did you choose to focus on the S&P 500?
I’ve been doing this for 26 years and I used to trade a lot of S&P futures. Now I do mostly the bull and bear ETFs because they’re just two times leveraged, and because of the big ranges we have these days, and because if you’re doing, for instance, weekly/daily charts and you have a 30- to 40-point move in the daily before you’re triggered into the trade, that’s a little too much capital exposure just for a futures trade.
The ProShares UltraShort S&P 500 ETF (SDS), which is a bear market S&P index two times leveraged, and the ProShares Ultra S&P 500 ETF (SSO) is the bull market two times leveraged. These are great vehicles to trade when we have higher volatility.