A popular topic in trading circles is the use of multiple timeframes. Lots of traders like to use more than one timeframe to support their hypotheses and used properly such techniques can have considerable benefits.

However most proponents use relatively similar timeframes and in my opinion in doing so they are missing the true value of such an approach. I like to use truly disparate timeframes, ones that are radically different to each other.

Copper last week gave us a timely example of this, so let’s use a real life example to illustrate the power of this often misunderstood concept.  We will start with a daily chart of copper…

Our strategy gave us a buy signal at 435 shown with the red arrow, which we duly entered and we are still holding the bulk of the open position. Actually our own buy signal was in fact supported by a more traditional technical feature on this same daily timeframe…

We can see an attempted downside break from the longer term chart formation a few weeks ago. A failed breakout can often lead to a much more impressive assault on the other side. So in this case the breakout to the upside which came the day after our buy signal could be expected to perform well.

So once we had a daily buy signal its next a case of trying to limbo in at the best possible price. To see this we drop down to an hourly chart, obviously a much smaller timeframe…

After the daily buy signal we actually entered overnight with a resting order as shown by the red arrow. What can we see here on this hourly chart? Here we have a simple little bull flag providing a nice lower timeframe entry into our main daily setup.

Sadly these things don’t set up perfectly as frequently as we would all like, but we are regularly talking in the chat room about looking for hourly entries into longer term positions. Why? Think about it from a Risk/Reward perspective. If you can occasionally combine the risk of an hourly trade with the reward of a daily trade – this is something to be played for any time such an opportunity shows its face!

Finally let’s look at the weekly copper chart…

Oooh! Now we have a weekly bull flag and with a little luck this may be ready to start kicking in for us. Only time will tell. But what I do know at this early stage is that an hourly entry into a daily set up with even the faintest possibility of capturing a weekly move – this is trading utopia and is the sort of thing that all professional traders should always be on the lookout for.

I know many traders like to use combinations of 5 minute and 15 minute charts, or hourly and 120 minute charts, etc. While there is nothing wrong with that per se, the real advantage of multiple timeframes is to be gained from the correct use of radically different timeframes.

We will be exploring the power of disparate timeframes at our seminar this summer. Are you ready to put a range of clear cut, logical and practical techniques to use in your trading? If so be sure to join me, George Kleinman and Jeff Quinto for this one time, one day event as we share the secrets gained from 100 years experience in the markets.

A maximum of 50 people worldwide may join our private clients at this exclusive event. If you are ready to take your trading to the next level, please reserve your place before this event is advertised to the general public. I hope you can join us for a truly revolutionary day… www.CenturyOfTrading.com

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Copyright © Simon Townshend Ltd 2011, all rights reserved

This is a follow up to my article of June 26th – Catching a tiger by the tail.  (Its on the home page www.Simon-Townshend.com if you are a more recent subscriber.)

If you recall we were looking at the sugar market and discussing how to manage a long position in what we thought would be one of those rare examples of of an “outlier” trade.  At the time I wrote:

“…when trailing a stop with the objective of catching an outlier event, remember to leave the market room to breathe, don’t trail the stop too tightly.  Here we saw nice follow through on Wednesday and Thursday, but the chances are that the market will pause and consolidate for a few days very soon.  If the stop is too tight we risk getting nicked out too soon.  So we will keep it well back for now, still being guaranteed a decent profit.  Once the market has consolidated and left behind a new swing low, then we will ratchet our stop up again and just see what unfolds from there…”

Now it is time to reverse that recommendation and tighten the stop right up close to the market.

This is how this has been unfolding:

The first retracement held well above the mid-point of the expansion day that we used to provide our first wide trailing stop location.  As the trend continued the stop could have been slowly ratcheted up still keeping it well away from the market.

Now the market has gone parabolic and we need to rethink the strategy again.  The first thing to know about a market that looks like this is that the biggest part of the move may well still be in front of us, as incredible as that might sound!  Once a market starts going parabolic it can really accelerate hard.  But when a parabolic move ends it usually ends spectacularly in a massive V-reversal.  You do not want to be holding the position when that happens as the down move can be at least as violent as the initial move up.

So we would like to give this a little bit more chance to show us whether or not it has more to give to the upside, but we don’t want to be holding on once this swing has ended.  Overall we have to remember we are traders here to make profits.  If you are still holding this you have an enormous unrealised profit under your belt.  You have achieved the almost impossible task of spotting and catching an outlier.  So first and foremost you must hold onto that profit.  The market will take it back from you if you don’t grab it!

Now the strategy is to lock in this outsized profit.  There is still an outside chance that this market will continue to explode higher, so dont just exit but do tighten that stop right up tight to ensure any give back is only a small percentage of your open profit.  A true parabolic market will keep making a higher high and a higher low every single day until the end when you dont want to be holding the baby any longer.  So you can now trail a stop right up to yestreday’s low each day that a new high is made (i.e. ignore inside days).  At some point, maybe today, you will get taken out and you will bank one of the biggest profits you will make all year.  At the same time you are still giving yourself the chance to increase that profit even further.

An awful lot can happen in a day from this point on.  So now is definitely the time to be on your toes.

Disclaimer, risk warning and copyright notice apply to all articles published on this site.

Copyright © Simon Townshend Ltd 2009, all rights reserved

In Golden Rule 1, we discussed the importance of having a robust, quantified and clearly defined exit strategy for each and every trade or investment.

Irrespective of the style, strategy or timeframe, successful trading is very much about understanding and working with probabilities.  This has to be so in a world where there are no certainties, unless you are able to forecast the future.  In 30 years I have never found a single person ever who is able to forecast the future, so I am prepared to bet that you are in exactly the same position as me – having to work with a statistical advantage and allow probability to make profits for you over the long run.

Consequently our exit strategies must be designed within this same statistical framework and then there is one particular fact to accommodate – the bigger the profit you shoot for the less chance you have of achieving it.  This is why the best traders don’t play for home runs.  They treat trading as a business of slowly grinding out regular more modest profits.  “A day’s work for a day’s pay” is the mantra.  Notice how opposite this mentality is to that of a gambler who is constantly thinking that “the next one will be the big one”, only to be disappointed yet again.

With the chances of hitting big home runs being so low, most exit strategies should almost ignore that possibility.  But that does not mean that we won’t occasionally find we have caught a tiger by the tail.  So we also have to know how to adapt when luck, which is all it is, lends a helping hand.  Here is a great example of how we adapt our exits to handle a potential outlier event.

Sweet move in the sugar market

Let’s take a look at the sugar market – usually a pretty dull, boring market that for some reason flew into life this week handing us an unexpected gift.  On this chart I have marked up the last four days, Monday to Thursday.

Over the weekend our S-I-R swing trading system flashed up a buy signal in sugar.  So on Monday morning we dutifully bought some.  We got lucky on the entry buying fairly close to the low of the day.  As usual (Golden Rule 1) our exits were predetermined so exit orders were placed as soon as we were filled on the buy order.  Monday passed uneventfully for this trade, although I was pleased to see it close on the high of the day.  The best trades always work immediately and without giving you any grief so this was a good sign.

Tuesday arrived and blast off!  For some unknown reason (unknown to me at least) the whole world must have decided to buy sugar and we had this explosive move that you can see in this huge bar on the chart.  Our trades are exited in 3 equal parts and the first two exit orders were both filled during this big Tuesday rally.  Each exit has a specific purpose within our trading plan and a predetermined price.  Now here is the first trick – It is very unusual for two exits to be achieved the same day, so when this happens I know something unusual is going on.

Because two exits in a day is an outlier event, I switch tactic for the third and final exit.  As we potentially have the proverbial tiger by tail here I cancel that final exit order.  Instead we switch to using a trailing stop as there is now a very good chance that it will reward us disproportionately for holding on.

Here is the second trick – If the move is for real a huge range like we saw here on Tuesday will not be retraced into very far so the stop can be placed initially around the mid-point of the day’s range, i.e. around 16.50 here in Sugar.  This in itself will lock in a nice profit if triggered, so we will do OK even if Tuesday turns out just to be a one day wonder.  However the odds favour a much bigger move and as that move unfolds the stop can be progressively raised locking further profits in.

But when trailing a stop with the objective of catching an outlier event, remember to leave the market room to breathe, don’t trail the stop too tightly.  Here we saw nice follow through on Wednesday and Thursday, but the chances are that the market will pause and consolidate for a few days very soon.  If the stop is too tight we risk getting nicked out too soon.  So we will keep it well back for now, still being guaranteed a decent profit.  Once the market has consolidated and left behind a new swing low, then we will ratchet our stop up again and just see what unfolds from there.

Disclaimer, risk warning and copyright notice apply to all articles published on this site.

Copyright © Simon Townshend Ltd 2009, all rights reserved