Folks, The following fwded email [Courtesy: Dave] has great amount of information for technical traders, information that can only be obtained with years of trading knowledge and experience. Most importantly, this captures the "big picture" of the market w.r.t technical analysis and various indicators, like no other (as seen by me, in my limited trading experiece of 3 years and 12k donation to various so called "stock market education institutions" :)) I sincerely thank Dave for sharing this information with me and entire options club yahoo community. Regards Irshad
--- On Sun, 6/13/10, dneely777@aol.com <dneely777@aol.com> wrote:
From: dneely777@aol.com <dneely777@aol.com>
Subject: Re: [TheOptionClub.com] Multiple Timeframe Question
To: mirshadu@yahoo.com
Date: Sunday, June 13, 2010, 5:06 PM
Irshad, I've been debating with myself, on just how to respond to your questions. I've read a lot of books on technical analysis, gone through various training programs and spoken with some very experienced technicians, including CMTs. I don't want to end up sounding like I know it all . . . . . because, I don't. The only answers I can offer you are based on my own limited experience and beliefs. There are many traders, including some in this yahoo group, that say technical analysis (TA) does not work. Even though I'm a technical trader, I agree with them. Conventional TA, especially taught in the conventional way, does not work. Nothing works all the time in all situations. When you use TA as most traders have been taught to use TA, you become "one of the herd". You become a sitting duck for professionals that have long ago figured out how to exploit the retail trader. The professionals have their own little herd, but that herd has the influence or power to push the main herd around wherever it wants. There is a line in one of Dr. Elders books that go something like, "retail traders buy breakouts, professional traders sell breakouts." At the time I read that line, I was a student with Investools, being taught to "buy the breakout". I was being taught conventional technical analysis, in the conventional way. I was being taught to be part of the big herd. Now, there are times you can run with the main herd and times to run with a smaller herd. By the way, you have to run with some herd, or you'll get run over. TA helps to decide what herd you what to be in to help your chances of survival. Part of the above is just retail trader paranoia, but not all of it. The chart repeatedly shows us where professionals have likely started a move and the retail traders jump in too late. Conventional TA applied in conventional ways, puts us in the main herd. We end up near the front of that herd, which is better than being at the rear, but we are still in the main herd. To me, technical analysis is the study of price action. I believe that past price action can give us some insight as to what future price action might be. I agree with the fellow that said "history does not repeat itself, but it often rhythms". Price action is rarely, if ever, identical. However, certain patterns are similar enough to be helpful in the trade planning process. Almost all indicators are based on price, or price with some other function such as volume. Indicators are a derivative of price. This makes them lagging by nature. The latest reading for an indicator can not be factored until the period being used has closed. That period is now history. The indicator based on that period can only show a reflection of what has already happened. To use technical indicators in your trade planning, you have to believe that future price action will relate, either positively or negatively with what has happened. Traders, in an attempt to overcome the lagging nature of indicators, adjust the parameters of those indicators, hoping to close the gap between current price action and the indicator itself. By speeding up the indicator, it does reflect price action more closely, but the signals normally become less reliable. Generally, the faster the settings (the sho rter the lookback period) on an indicator, the more signals you get and the less reliable the signals become. With slower settings or parameters on your indicators, the fewer, but somewhat more reliable signals you will receive. Either way, it is still, just a reflection of what has already happened on the chart in any given time frame. So, why not go to the source? Get your information from the chart. Indicators use price, why not get your signals first hand? Free markets are driven by supply and demand. On a stock chart, supply and demand are interpreted as support and resistance. Support being demand, or buyers. Resistance being supply, or sellers. To me, this is the most reliable indication of possible future price action. I believe supply and demand are the single most important influences on price movement. I try to determine the most likely zones of supply and demand within the time frame I am trading as well as larger term time frames. The next most important consideration of price action is momentum. Or, how much push is behind the price action. There are indicators considered useful for determining momentum, but once again, they tend to lag the market. Momentum can be read directly from the chart. The size of the bars, the relationship between the open and close and the relationship from one bar to previous bars, all indicate momentum. Momentum can be seen in one bar, or a series of bars which becomes a trend. Momentum and trend go hand in hand. You need to determine market direction, or trend and then the momentum of that trend. The range can go from no, or a sideways trend, with low momentum, to strong trend in either direction, and strong momentum. I watch for a shift in momentum, or a divergence of momentum and trend direction. Trend is the direction you are traveling, momentum is the speed you are going. You slow down before you turn, just like price action before a reversal. But, not always. Sometimes we get a burst of speed, right at the end of a trend. This is the tail end of the retail herd jumping in too late. Trends are composed of smaller trends of shorter period time frames. Each smaller trend will also have it's own momentum. A short term trend usually shows weaker momentum as it approaches an opposing intermediate term trend. That trend may have weakening momentum because it is approaching an even longer term trend in the opposing direction. Or, perhaps the intermediate term trend has recently launched and is building momentum. It could be far from an opposing longer term trend, or threatining to break that longer term trend. Trend and momentum tend to continue until acted on by an opposing trend from a longer term time frame. These are conditions we need to be aware of before planning our entries and exits. The last factor I pay much attention to is volume. Of supply / demand, momentum, trend and volume. Volume is the least of my concerns. Volume is nice to have, and I certainly want some showing up at some point to confirm my entry, but it is not necessarily necessary. Volume can lead a price move, it can lag a price move, or it can correspond with a price move. The question is; does price lead volume, or does volume lead price? My answer is; in most cases, yes. There is an old saying, "the market moves fastest and furthest, with the fewest people onboard". A professional type move could have a good boost in price without the usual level of volume. You want to be onboard when that happens, because more of the herd will follow. The only way to make money in the market, is to have buyers come in after you have bought, or sellers come in after you have sold. Technical analysis and it's many indicators is based on science. However, trading with technical analysis is completely subjective and becomes more of an art form tahn science. Especially when one gets into drawing trendlines and price patterns. Traders need to to realize that no form of technical analysis works all the time. It's great when it works, but it only works, when it works. And no amount or form of TA will save a trader from himself. It's not magic and there is no holy grail. It's just a tool used to help plan a trade. The most important part of the trade is not the TA, it is having a plan and the trader himself. Now to more directly answer your question. I have no idea how you are using these indicators, so it's impossible for me to judge their effectiveness. I can give you some general feedback. 1) I like EMAs, but the way I would use them, these periods are too short. They may be perfect for your application, but you started off asking about the triple screen method, so that's how I'll treat the question. I would use MAs in my primary, or "big picture" screen. Their main function on this screen would be to identify trend. Longer term MAs work better for this. You use EMAs, so I suggest; 13,21,34 or 55. One or two of these would be fine. 2) MACD is OK. At one time it was a favorite of mine. It is considered a momentum indicator, but has some features of an oscillator as well. The biggest problem is, MACD tends to lag a little more than some other indicators. My favorite use of MACD was divergence. Negative divergence works good as a signal if price is at resistance. Likewise convergence, more commonly called positive divergence, is a good signal if price is at support. 3) Slow Stochastic, another of my favorites from earlier days. If it's doing what you want it to do, great. Use oversold, buy signals in uptrends and overbought, sell signals in downtrends. 4) CCI, a great oscillator, but do you need both Slow Stochastic and CCI? This parameter is set too low. You are getting confirmation of daily price action. If price goes up, CCI is up. If price is down, CCI is down. Do you need an indicator to tell you price closed higher or lower that day? Just look at the chart, or lengthen the look back period of CCI. 5) Swing Index, this is redundant. If I remember correctly, it's calculated similar to CCI. Like CCI, the look back period is too short and for the same reason. Suggest you try Stochastic, CCI or Swing Index alone, or a combination of two. Do not combine CCI with Swing Index. As far as the charts that were attached. Too little information. As a rule of thumb, you need one hundred bars as a bare minimum to get a feel for price action. Two hundred is better, but unless you have pre drawn your trendlines and S/R zones from a longer look back period, this is still too short. Well this has rambled on long enough. Hope there was something worthwhile in it for you. Dave
-----Original Message----- From: Mohamed Irshadullah <mirshadu@yahoo. com>
To: dneely777@aol.com
Sent: Thu, Jun 10, 2010 12:01 pm
Subject: Re: [TheOptionClub.com] Multiple Timeframe Question
| Dave, Wonderfully explained!! My sincere thanks!! I will definitely try to read Dr. Elder's book. I have following indicators, 1) 3 & 5 EMA 2) Macd (3,5,3) 3) Stoch Slow (5,3) 4) CCI (3) 5) Swing Index (3) Unfortunately, I am not using Trend line, S&R, I will add it to the plan. Can you pls advise if these indicators are redundant (telling same things) or complimentary? Should i swap one of the indicators to have better setup? Is there anything you would advise on the chart i have attached. Best Regards
From: dneely777@aol.com <dneely777@aol.com>
Subject: Re: [TheOptionClub.com] Multiple Timeframe Question
To: OptionClub@yahoogroups.com
Date: Wednesday, June 9, 2010, 9:23 PM
Irshad, The trading approach you are asking about is commonly known as the "triple screen method". I suggest you read Dr. Alexander Elder's book, Come Into My Trading Room, for a detailed explanation of the method. This book covers many other aspects of trading as well. It is a very worthwhile read. To get started with this method, you first pick the time frame you wish to actually trade. This becomes your trading, or intermediate screen. Based on your e-mail that would be a 15 minute chart. You then use a multiplier from 4 to 6 to determine you primary, or longer term time frame and your timing, or short term time frame. Elder suggest a multiplier of 5, but this number does not always work out conveniently, so I go 4-6. Your three screens would be: Primary - hour, Trading - 15 minute, Timing - I would go down to a 3 minute, rather than use a 5 minute. The primary screen is used to determine, trend, support, resistance and place trend lines. Identifying support and resistance zones, as well as primary trend is crucial. You do not want to enter a trade that is likely to run into a longer term trend running in the opposite direction of your trade. You might want to apply several moving averages, and I suggest adding a momentum indicator of your choice. The trading screen, in this case a 15 minute chart, is used to identify the set up and plan the trade. You are expecting a short term correction to resume the trend identified on the primary screen. You need to determine your risk to reward, your entry point, your loss exit and your profit exit. On this screen, you could use the same momentum indicator as used with the primary screen, or choose a different one. This is also the screen to add your oscillator. You mentioned Stochactic, and that would be alright to use for this purpose. Now, provided you are not going to be running into an opposing longer term trend, you wait for price to approach one of the support or resistance zones identified on the primary screen. If the primary trend is down, using the trading screen, wait for stochastic to be overbought AND price approaching a resistance zone, you then have a short set up. If trend is up, stochastic is oversold AND price is approaching a support zone, you have a long set up. Again, this is on the trading screen while keeping the primary trend in mind. In both cases you are trying to catch a bounce in the direction of the primary trend. In trending situations, oscillators should only be used for buy signals when oversold while in a longer term up trend, and sell signals when overbought, while in a longer term down trend. They should only be used in conjunction with support in an up trend and resistance in a down trend. Oscillators are used, or should be used to confirm a support or resistance zone, not as a stand alone signal to enter a trade. In a sideways trend, you could sell when overbought and at resistance, and buy when oversold and at support. Remember to check the reward to risk ratio. If you plan to counter trend trade using oscillators, you're on your own, and good luck to you. OK, so now for the timing screen. The three minute chart allows you to time the trade entry. That is all it is used for. The entry point has been planned ahead of time on the trading screen. You wait for price to hit your entry on the timing chart and enter the trade. This gives you a better entry than using the 15 minute chart and helps reduce risk, since you are closer to your loss exit. If you need to wait for confirmation before entering, you still come out with a better entry price. Enter and you are done with this screen. I would use just price action on this screen, but if you would like to have an oscillator to watch, go ahead. As soon as the trade is placed, put your stop orders in. One for loss and one for profit. This could all be done ahead of time using an automated order. Your entry could be triggered and both stops placed without you even being there. Personally, I like to watch and do it manually. Manage the stop loss order according to your trading plan and let the market do what it will do. Hope this is what you were looking for. Dave
-----Original Message----- From: mirshadu <mirshadu@yahoo. com> To: OptionClub@yahoogro ups.com Sent: Wed, Jun 9, 2010 9:13 am Subject: [TheOptionClub. com] Multiple Timeframe Question Guru's,
Appreciate your feedback on following question with multiple timeframe. Also i understand that this question could be more do with personal style of trading, never the less i would appreciate your valuable input.
Lets say if I am trading with 3 timeframe chart (1 hr, 15 min, 5 min)with identical indicators and identical parameters.
1) For Trade entry, should i be using top to bottom approach or bottom to top approach where
Top to bottom - I "focus" on 1 hour chart, and if i want to go long, i wait for Stochastic to rise on 1 hr chart, and then look for 15 min stochastic to rise and if both of true, look at 5 min chart and enter the trade only if stochastic is rising in all of them.
Bottom to top - I "focus" on 5 min chart, and if i want to go long, i wait for Stochastic to rise on 5 min chart, and then look for 15 min stochastic to rise and if both of true, look at 1 hour chart and enter the trade only if stochastic is rising in all of them.
2) For trade exit - Should i be exiting the trade on indicator voilation on long timeframe (1 hr) or short timeframe (5 min) or medium timeframe (15 min)
Best Regards & Happy Trading!!
- Irshad
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