Multiple time frame use in trading systems

When we first start to trade, one of the rules of trading is “Don’t try to trade on multiple time frames.  Stick to one time frame.”  For a beginning trader, that makes a lot of sense.

When I first started trading I wanted to use a dozen indicators, and have multiple time frames up so that I could see every possible tool that would tell me which way the market was moving, and thus ensure I was placing my trade in the right direction.

However, what ended up happening (you can see this coming, right?) is that instead of all the indicators and time frames aligning, I got conflicting information.  The 15-minute chart would be showing a nice uptrend, whereas the 1-hour or 4-hour chart would be trending down; moving average cross-overs would be telling me it’s time to buy, but the RSI would be telling me to sit still.  More information is not better for a beginning.

What I needed to be told was “watch the market and learn how it moves.”  Use a single time frame, and one indicator, and learn it.  Even if the indicator doesn’t provide great buy or sell signals, it’s so valuable to learn to watch for certain signals, patterns, and market behavior; once you’ve figured that out, you only need one or two indicators, and the rest is just observing and watching for what happens in your trade setup.  Expert traders I’ve studied definitely do use multiple time frames, watching for “confluence”, where a higher time frame confirms a support or resistance level seen on your current time frame.

On the other side of things is the automated system developers.  I’ve seen a number of books and articles that describe how to use multiple time frames in a strategy to confirm a trend or use the higher time frame to determine what kind of market we are currently in.  Howard Bandy uses a higher time frame in several of his strategies in the two books I have,  Quantitative Trading Systems and Mean Reversion Trading Systems.

Because we’re peeking at multiple time frames inside the program code, it’s a little easier to do.  We don’t need to worry about getting confused or having too much going on at the same time, because the computer will be just fine with multiple time frames.  It’s not a good idea to just throw it in the program anywhere; obviously, it needs to be part of the greater strategy you are trying to implement.  Trading strategies can often benefit from extra confirming checks using multiple time frames.

It’s a little tricky to get the trading platform to see two time frames at the same time.  In Metatrader, many function calls require an “int timeframe” parameter, and we use a zero there to indicate the current time frame.  If we are writing code that uses multiple time frames, it is likely you will know the time frames in advance (say 15 minute and hour charts), so in each indicator, you will need to specify which time frame that calculation is being done for.

If you’re organized, it shouldn’t be hard; using the additional longer time frame will give you the confirmation you’re looking for.

 

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