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@yahoogroups.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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