Selecting time frames
The first question you have to ask yourself is what time frame do you primarily trade? This time frame is called your "base" trading time. The next step is to select your "major" and "minor" trading time frame. The major and minor time frames are the most widely used larger and smaller time frames relative to your base time period. In this example, our base time period will be 5 minutes. So, the most widely used larger time frame would be the 15 minute chart for our major. Our minor would be the 1 minute chart. You can use this model for any time frame. Below I have listed out some common base times and their corresponding major and minor time frames.
|1 minute||5 minute||Tick Data|
|5 minute||15 minute||1 minute|
|15 minute||30 minute||5 minute|
|30 minute||60 minute||15 minute|
What to look for on each time frame
This is totally up to you and largely depends on your trading style. If you are looking to buy a breakout on a 5 minute chart, you will want to make sure the stock is trending strongly on both the 15 minute and 1 minute charts. Often times traders will buy a stock that is breaking out on their base time frame, but if the major or minor are not trading in the same direction, you can and will face opposition. The powerful moves in the market occur when different time traders are all moving in the same direction. This confluence generates the "juice" we all need to make easy money in the market.
Only base your entries and exits on one time frame
While you are looking for confirmation that all 3 time frames are in your favor, you can only use your base time frame for determining your entries and exits. Don't start out using a 15 minute chart as your base, then start using 5 minute bars to stop you out. Remember, the traders in the minor time frame are looking for smaller price movements, so if you go down to that minor level to place your orders, you will be thrown around quite frequently. You are only using the major and minor time frames to confirm what your base time is telling you. Look at the major and minor time frames as technical indicators, but not as something you should base your entries and/or exits upon.
Examples of trading on multiple time frames
If you have access to a charting service, pull up a chart of UNP from 9/18. If you don't have a charting service, please read our article on free stock charts. Notice how UNP was trending well above its 10-period moving averages on the 15-minute, 5-minute, and 1-minute chart when it broke out at 2:20 pm. A good confirmation for putting on this long position, is for the stock to be "x" amount above the 10-period moving average on all 3 time frames. Notice, how when all 3 time frames were saying the same thing, it generated a sharp move higher later in the day.
What to avoid when trading multiple time frames
Do not base your order execution for entries and exits on multiple time frames
If a stock is trending hard on all 3 time frames, exercise extreme caution if you plan on going counter to the primary trend
Do not use multiple criteria for identifying commonality between multiple time frames. So, if you are looking for stocks trending strongly, do not use the RSI on one chart and a simple moving average on another. Make sure you use the same criteria for trading multiple time frames, this way they are all providing the same picture.