GET Financial Education Series - Futures
Trading Using Multiple Timeframes – Lesson 13
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Futures markets around the globe are able to function properly because, at any given time, some traders want to buy Futures contracts whilst other traders want to sell them. A trader's desire to buy or sell is dependant on their strategy, their objective and their chart time-frame. Short-term traders and long-term traders are going to see dramatically different things on their charts because they are watching quite different charts. Short-term traders are probably looking at 1-minute to 15-minute charts, whilst long-term traders are probably looking at daily, weekly or monthly charts.
Trends, support and resistance lines, and technical indicators look much different on a 1-minute chart to the way they look on a daily chart. For example you may look at a 1-minute chart of Gold (ZG) and see that the price appears to be in a down-trend. Yet if you switch your chart to a daily chart you may see that the price has been in an up trend for years.
So which chart is right? Is Gold in an up trend or is it in a down trend? The answer is that both charts are right. It all depends on your perspective and your trading timeframe. If you are a shorter-term trader, you should be focusing on shorter-term charts and trends. If you are a longer-term trader, you should be focusing on longer-term charts and trends. However if you can get both the shorter-term trends and the longer-term trends to line up, you stack the odds of success in your favour.
To get a comprehensive idea of what trending and support and resistance forces are affecting the Futures contracts that you are watching, you should be analysing the following three charts (timeframes) in your technical analysis:
- Trend chart (Longer-term chart)
- Signal chart (Chart you typically use)
- Timing chart (Shorter-term chart)
Once you have analysed each timeframe, you can put them all together to confirm a high-probability trading setup.
Trend Chart
The trend chart, as the name suggests, helps you to identify the predominant trend with which you should be looking to trade. If the price in the trend chart is trending upward, you should be looking to buy the Futures contract. If the price in the trend chart is trending downward, you should be looking to sell the Futures contract.
To identify the timeframe you should be using for your trend chart, you first need to identify the timeframe you ordinarily use on your trading (signal) charts. Once you have identified the timeframe of your signal chart you should go up one timeframe to find the timeframe that you should be using on your trend chart.
The following is a list of common signal-chart timeframes. Use it to identify the appropriate timeframe for your trend chart:
| 1-minute signal chart |
15-minute to 30-minute trend chart |
| 5-minute signal chart |
1-hour trend chart |
| 15-minute to 30-minute signal chart |
4-hour trend chart |
| 1-hour signal chart |
1-day trend chart |
| 1-day signal chart |
1-week trend chart |
| 1-week signal chart |
1-month trend chart |
For example if you typically trade Futures contracts looking at a 1-hour chart, you should use a 1-day chart for your trend chart. If you typically trade Futures contracts looking at a 15-minute chart, you should use a 4-hour chart for your trend chart.
Once you have identified the timeframe you should be using for your trend chart, you should determine the prevailing trend on the chart using diagonal support and resistance levels or moving averages.
You can see on the weekly chart for the Australian dollar (ADZ8) that the diagonal support level indicates that this Futures contract is in an up trend (see Figure 1).
Figure 1 - Trend Chart
Extra Material
One of the many benefits you will enjoy as you use multiple timeframes in your investing is that you will see the Futures market from the perspectives of many different types of traders. By looking at both short-term and long-term charts you will be aware of what both short-term and long-term traders are watching. This will help to prevent you from being caught off-guard by any sudden price movements.
Signal Chart
The signal chart is your most important chart. It provides the trading signals that tell you when to look for buying and selling opportunities based on the trading methodology you use. For instance if you typically use the commodity channel index (CCI) to help you identify trading signals, you will use it here on the signal chart. You don't have to use the indicator on the trend chart or the timing chart (see Figure 2).
Figure 2 - Signal Chart
Using a signal chart in conjunction with a trend chart enables you to more accurately identify potentially profitable trade signals. For example if your trend chart shows the price is in an up trend, you should only be looking for 'buy' signals on your signal chart. The best way to take advantage of a longer-term up-trend is to buy the Futures contract. If your trend chart shows the price is in a down trend then you should only be looking for 'sell' signals on your signal chart. The best way to take advantage of a longer-term down trend is to sell the Futures contract.
In effect the trend chart allows you to ignore the less-profitable half of the trading signals you see on your signal chart. Since these trading signals are going against the longer-term trend, they will most likely be unsuccessful.
Now that you have identified your trading signals you will then need to determine exactly when to enter and exit your trades using your timing chart.
Timing Chart
The timing chart, as the name suggests, helps you to time exactly when you should enter and exit a trade. Every tick counts when you are a Futures trader, so the more accurately you can identify your entry and exit points the more money you should keep in your account.
The following is a list of common signal-chart timeframes. Use it to identify the most appropriate timeframe for your timing chart:
| 1-minute signal chart |
Tick timing chart |
| 5-minute signal chart |
1-minute timing chart |
| 15- to 30-minute signal chart |
5-minute timing chart |
| 1-hour signal chart |
15-minute timing chart |
| 1-day signal chart |
1-hour timing chart |
| 1-week signal chart |
1-day timing chart |
| 1-month signal chart |
1-week timing chart |
You can use one of the following two methods when pinpointing your entry and exit signals on your timing charts:
- You can identify the trend and support and resistance levels
- You can use the same technical indicator you use to generate your trading signals
Identify trend and support and resistance - if you see a buy signal on your signal chart, you could expect to see the price on an uptrend on the timing chart. You also expect to see that the Futures contract price is closer to support than it is to resistance. This tells you that the Futures contract has room to move higher before hitting resistance. Of course if it has just broken up through resistance, it should continue to move higher.
Using a technical indicator - if you use a technical indicator such as the commodity channel index (CCI) on your signal chart to generate buy and sell signals, you can use that same indicator on your timing chart to help you identify when to enter or exit your trade.
For example if you did indeed use the CCI on your signal chart, and it gave you a buy signal, you would add the CCI to your timing chart and make sure that it was giving you a buy signal on the timing chart as well. If the CCI is not giving a buy signal on the timing chart, you should wait until it gives a buy signal on the timing chart before you enter the trade (see Figure 3).
Figure 3 - Timing Chart
High-Probability Trade Setup
Let's take a look at what a high-probability trade setup looks like using the multiple timeframe trading approach. We will be looking at an example of Crude Oil (CLZ8) using a weekly chart as the trend chart, a daily chart as the signal chart, and a 1-hour chart as the timing chart.
First you should look at your trend chart to see in which direction the currency is trending. As you can see on the Crude Oil weekly chart, the price has been on an up-trend for some time now (see Figure 4). It would be foolish to fight this trend and try to sell the Futures contract.
Figure 4 - Trend Chart (High-Probability Trade Setup)
Next you should look at the signal chart to identify an appropriate buy signal for Crude Oil. In this example we are looking at using the commodity channel index (CCI) to generate the trading signal. You can see on the daily Crude Oil chart that the CCI gave a buy signal on 4 May as it crossed from below -100 to above -100. The Futures contract price was also on an up-trend at that same time (see Figure 5).
Figure 5 - Signal Chart (High-Probability Trade Setup)
Lastly you should look at the timing chart to identify an appropriate time to buy Crude Oil. You can see on the 1-hour chart that the price is trending higher and finding support along an up-trending support level (see Figure 6).
Figure 6 - Timing Chart (High-Probability Trade Setup)
When you can see that the trading signal generated on the signal chart corresponds with both the trend on the trend chart and the price movement on the timing chart you should be confident that your trade would probably make money.
Using multiple timeframes provides you with more accurate trading information. Better information leads to better trades. Better trades lead to more profits and a wealthier – perhaps happier – you.
Trend Chart
