Multiple timeframe analysis can provide good context and perspective on market moves. Take a look at the daily and weekly chart of the EURGBP below, which popped up on my radar screen because of the 3.2 sigma move underway this morning.
The daily chart is strong, and appears to be set to break to new highs. If this were a stock, we might be concerned about overextension, but currencies do not mean revert in quite the same way—some adjustment to how we read currency charts is needed. On the daily chart, we have a pretty good setup to at least look for long entries over the coming week.
However, the weekly chart shows a potential Anti setup: the large selloff near the beginning of 4Q 2016 generated enough downward momentum to challenge the multi-year uptrend, and probably to demand at least a retest of lows if not another new leg down. On this timeframe, we’re looking for a short.
How do we resolve this tension? Many traders can get stuck in “paralysis by analysis” and don’t know what to do. If you find yourself having to study a chart or spend a lot of time with it, move on—the best trades speak to us rather quickly. But these types of situations, in which timeframes conflict, occur fairly often, so you need some plan to deal with them.
What’s the best plan? Rather than answering that question, let me leave you with a few possible solutions:
- Pass on the trade. Conflict leads to confusion so just move on.
- Take the long trade on the daily chart; there’s often enough room for this trade to play out before the higher timeframe influence kicks in.
- Ignore the multiple timeframe influences and just trade the pattern on one chart and timeframe. (This is more viable than you think, and a possible good step toward simplicity.)
The following may help to:
1) Look at it in a different charting package. I’m always surprised just what a difference this makes.
2) Look at other FX crosses for confirmation.
3) Look on Twitter, Bloomberg etc to see if there is a tendency for opinion/news to herd you into taking a long or short. If there is this bias, you may want to take the opposite position, or at least be prepared to, as the reaction will be violent if the consensus move fails.
Stewart
I agree in point 1)
I am using Finviz to check the equities set-up versus their industry competitors with plenty small charts on on page – and this also helps to find sometimes even more compelling set-ups that slipped through my quant scan. Also reminds me that charts are only one possible graphic representation of buying and selling pressure and there is a lot of subjectivity on how scale x and y axis (and a lot of other things).
Point 2) and 3) would lead to paralysis by analysis for me and I worked hard to eliminate this…
If there was one single thing I had to point out that made the biggest difference in my trading in the more recent past, then it was the ability to find enough interesting set-ups to trade and so be able to skip easily any set-up that does not appeal to me in less than 5 seconds.
For the above set-up I’d see it short-term overextended on the daily and not so perfect Anti on the weekly. The set-up leg is not even making a decisive new low and the leg itself is bad for the bulls, but not so much worse than the pullback in 2Q16. So, clear skip for me, there are likely more appealing set-ups.
How about a backtest on daily v. weekly currency trend models using other pairs as out of sample data, determine if the data frequency results in statistically significant performance and choose accordingly?
Nick de Peyster
http://undervaluedstocks.info/