Finding confirmation is a key theme in technical analysis. High quality trades enjoy confirmation from different analytical methods. Other than using different methods, you can also seek confirmation from a higher time-frame. This is why multiple time-frames analysis is a popular method among swing traders. It offers a simple way to align yourself with the larger picture.
In this article, we will look at a simple dual time-frame swing trading strategy. It uses only a simple moving average and price action, on two time-frames.
Trading Rules – Swing Trading with Multiple Time-Frames
Swing trading aims to hold positions over a few days to a few weeks. Hence, the daily time-frame is our primary window of analysis. The weekly chart then forms our higher time-frame.
We observe the slope of the 20-period simple moving average (SMA) in both time-frames.
Bullish Trading Rules
- SMA is sloping up in the weekly time-frame.
- SMA turns down in the daily time-frame. (Pullback trade opportunity)
- Place a buy stop order above the lowest swing high above the SMA on the daily chart. (You might need to adjust your buy stop order downwards as lower swing highs form.)
- Cancel the buy stop order if the weekly SMA starts to slope downwards.
Bearish Trading Rules
- SMA is sloping down in the weekly time-frame.
- SMA turns up in the daily time-frame. (Pullback trade opportunity)
- Place a sell stop order below the highest swing low below the SMA on the daily chart. (You might need to adjust your sell stop order upwards as higher swing lows form.)
- Cancel the buy stop order if the weekly SMA starts to slope upwards.
Examples – Swing Trading with Multiple Time-Frames
In the charts below, the top panel shows the daily bars and the bottom one shows the weekly bars. The 20-period SMA’s color changes according to its slope.
Winning Swing Trade – RHT Long Trade
The chart above shows the prices of Red Hat Inc. (RHT on NYSE)
- The weekly SMA turned upwards at this bar. It was a sign of a bullish price context.
- We sat tight until the daily SMA turned red (sloped down). It presented a possible long pullback trade.
- We placed a buy stop order above swing lows formed above the SMA. We trailed the buy stop order down as new swing highs (black dotted lines) formed. Finally, the buy stop order was triggered at this price level. The most recent swing low (red dotted line) was our stop-loss level.
- After our long entry, the daily chart printed two deep retracements down. However, the weekly SMA maintained its positive slope despite these retracements. This observation encouraged us to let our profits run.
Losing Swing Trade – ICE Short Trade
Now, let’s take a look at a more unfortunate example in chart of the Intercontinental Exchange (ICE on NYSE).
- With three consecutive lower closes on the weekly chart, the SMA turned downwards.
- The bullish slope of the daily SMA was the signal to look for short setups.
- It was almost a month later that a swing low formed below the daily SMA.
- If the weekly SMA had sloped up as a result of this bullish drift, we would have avoided this trade. However, the weekly SMA was still sloping down. Hence, we placed and adjusted the sell stop order according to the swing lows. The red arrow points to the bar that triggered our sell stop order.
- The weekly SMA turned up before our stop loss (dotted red line) was hit. It was definitely a chance for an early exit and a smaller loss.
Although this trade conformed to our trading rules, the market price action did warn against it.
On the weekly chart, there were three bars that stayed completely above the SMA. It was a clear sign of bullish momentum on a higher time-frame. On the daily chart, prices stayed above the SMA for 19 consecutive bars. The sustained bullish price action was undeniable.
Hence, on both time-frames, there were bad omens for bearish traders.
Review – Swing Trading with Multiple Time-Frames
This dual time-frame trading strategy is a basic version of a multiple time-frame approach. Its benefit is that the trader gets confirmation while staying close to price action.
You can definitely improve this strategy by adding more time-frames or indicators. Other multiple time-frames trading setups use up to three time-frames with different technical indicators.
Want to add another time-frame to this trading strategy? Consider using the monthly time-frame to check the market tide. You can also drill down to lower time-frames (e.g. hourly) to refine your timing. It is an excellent way to cut your trade risk.
Take a look at other multiple time-frames trading setups covered on TSR.
Multiple time-frame trading strategies are solid trading methods as they consider the larger picture. But they are by no means the Holy Grail. At times, the larger picture will cause you to enter too late or skip a profitable trade. Take these necessary sacrifices in stride.
To learn more about multiple time-frame analysis, I recommend these books.
- Technical Analysis Using Multiple Timeframes
- Trading for a Living: Psychology, Trading Tactics, Money Management (for Alexander Elder’s Triple Screen Trading System)