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.)