Wednesday, September 10, 2008

Timeframes

If you use charts at all you have to answer one very important question:

What timeframe do I use?

If you look at traderchats, Yahoo/Google trading groups, follow one or another Guru, they will tell you to use this or that timeframe or a mix of them. Some claim 244, 333, 666, 2400 ticks are magic, others use 3 minute, 5 minute or 60min charts. Users with more sophisticated chartprograms try their hand at Range or Volume charts.

I'm no exception, I have used them all and I still have not found THE MAGIC CHART.

But I have recently found something else, something the timeframe you use for your trading should provide to be of use to you:

  1. You need to get clear entry (and exit) signals from your chart.
  2. Prices swing and you should see a retracement not too far away from your profitable exit. Taking 80% of the available range is emotionally great, taking 5% on the other hand, even if the result is the same will let you feel like a real dumbass.
  3. If stopped, prices should continue proving your stop right. You don't want prices turn one tick away from your stop.
  4. If you exit early, the retracement should give you another entry signal.

Let's start with a 30min DAX chart

Globetrader_03 

Yes you see nice moves on that chart. Now say you usually take 20 ticks per trade, which translates to 10 points or 250 Euro/trade on the DAX. Not bad, but looking at bars showing moves of 50 points within one bar, these 10 points are just noise. Believe me, if you trade them with a small account they are not. On the other hand, where do you place a stop. Say you got a signal at 6210 at the open today for a long. The low of the current bar is just above 6180, the previous low is above 6170 (yes it's a Heikin-Ashi bar, so the low is not the true low, but I use HA-bars to see the trend better and that means the trend remains intact as long as the HA-bar low (or high) is not broken)

6210 long, with a target at 6120. Bar high was 6236, low 6182. My 10 point target is just noise on that chart.

Here is how I trade nowadays

Globetrader_04

Yes it's a 3 tick chart on the DAX, a 50-tick and the 30 minute chart. Remember I use the IB-datafeed, so expect 1/3rd of the regular number of ticks. On the E-Signal datafeed you might use 10 tick, 150 tick and 30minute to see a similar chart. (And no, I don't care about the missed ticks when I trade with the IB-datafeed, I don't need them. As you might already have guessed from my affinity to Heikin-Ashi bars, I don't care about the individual chart, or it's exact OHLC. I care about the swings and I want to enter a swing in the direction of that swing, take about 80% of the available range and exit with a feeling of a job well done))

That 3-tick chart on the DAX was the first timeframe, where I finally got 80% of the range with a 10 point target. The 50 tick chart has to be traded with 25-40 point targets to get the same 80% of the available range result. Unfortunately that comes with wider stops, which I can't afford on the DAX. Yes the 3-tick is fast, but using Heikin-Ashi charts the bars are clear, you get swings instead of tick levels and you can actually swing with the market.

3-Tick (real Tick chart) compared to a 3-Tick (Heikin Ashi chart)

Globetrader_65  Globetrader_66

So how do I decide what trade to take?

Globetrader_05

3-Tick is holding below the 240-ema, 50-Tick might bounce up, 30-min is in a downtrend, but retracing. A long is valid on the 50-Tick above 6200. That level is below the Stop level indicated on the 3-Tick, a long is valid on a bounce from the band on the 3-Tick

Globetrader_06

Seconds later we got that 240-ema test on the 50-Tick, a test of the band on the 3-Tick and a long around 6205 (6204.50 to 6205.5). The exit was a nice 10-pointer on that 3-tick chart. On the 50-tick its noise, on the 30 minute not visible.

So when you decide about the timeframe to trade and the charts you look at keep in mind, that you don't want to trade noise. Having entry and exit within 1 bar is fine at times, but for the long run it's just stress as you trade just intrabar noise. You trade with charts to see what the market is doing. Make sure you really can see what you want to see.

5 comments:

Tobi said...

Hi Globetrader!

Interesting post about using different, also real short-term timeframes. Thanks for sharing.

You using the 240-EMA on all three timeframes?
You also mentioned "bands" in your post. What kind of bands are you looking at and what settings do you use? Do you use them on all three timeframes?

Thanks for your insight,
Tobi

Globetrader said...

Hi Tobi,
yes the 240ema is on all charts...actually it's the same template on all charts. I don't like to think about the type of template used, when I look at a chart. So it's always the same template. Makes it easier to compare them.
The bands are something new altogether.
I use the bands to see extremes for a move. Every channel you create is used for that purpose.
I tried Donchian channels (which are still on the chart), Bollinger Bands, Keltner bands, Percentage channels and they all have a disadvantage or another.
I think the Donchian Channel is the most important in my type of trading, but it doesn't capture trends fairly well, as it shows a stairstep pattern instead of a line up or down, when trends are in place.
I'm a very visual person, so I like to see a line going up or down if there is a trend and thats why I added the bands.
They are a mix out of the bands named above by first calculating:
(Keltner+Bollinger+Donchian+Percentage Band+(Low or High of the last bar) / 5 and then having a 34ema of these values to provide for some smoothing of the line.

As I said I'm interested only in a visual representation of a trending market and a warning, that we might be at extremes in the timeframe I watch. I'm not looking for a support or resistance level in these bands.
Hope this helps.
Best regards,

Chris

Tobi said...

Hi Globetrader,

thanks a lot for your detailed information.

That's an interesting setup with the mix of the differnt bands. Looking forward to hearing your experience with them.

Have a nice weekend,
Tobi

Newton Linchen said...

Hi, Cris,

I'm a trader from Brazil and I trade the brazilian stock exchange futures contract. I would like to send you a picture of the template I use.

You see, I trade based in the influence the Dow Jones Industrial Index has upon our own market.

In your oppinion, what market influences the most the Dow Jones?

Niederhoffer states that is the Israel market and the Nikkei.

What's your point of view in this case?

Best regards,

Newton.
newtonlinchen@hotmail.com

Globetrader said...

Hi Newton,
sure send me the template.

The US market is influenced basically by the US market. It's the leading market. Sure traders will look what the NIKKEI did 8h before when it closed. They will look at the European markets, especially the German and London markets, but then they will trade US news and the world will follow. I have the S&P as leading market and I trade Australian SPI, DAX and FTSE based on the bias seen on the S&P.
If anything the Dow will be lead by the S&P.
Best regards,

Chris