$$ Trading in Multiple Time Frames

Brian Shannon recently wrote Technical Analysis in Multiple Time Frames. He advocates a minimum of three time frames be studied before committing capital to a trade.

For swing traders he suggests daily charts for long term trend analysis, 30 minute charts to analyze risk-reward, and 5-10 minute charts to fine tune entry. For day traders, he suggests 30 minute charts for long term analysis, 5-10 minute charts as an intermediate time frame, and 1-2 minute charts for fine tuning entries.

Brian's philosophy about time frame correlation is similar to that of Alex Elder who first wrote about his Triple Screen method in Trading for a Living. Elder looked for signals on daily charts that were in sync with the direction of the weekly trend, then used hourly charts to fine tune entries. In his later books, Elder offered tweaks and adjustments to the indicators and settings he used for the Triple Screen, but never varied from his time frame correlation.

Brian categorizes price action into 4 stages: accumulation (Stage 1), markup (Stage 2), distribution (Stage 3), and decline (Stage 4). This analysis is very reminiscent of Stan Weinstein's Secrets to Profiting in Bull and Bear Markets. Weinstein called the four stages: basing area, advancing phase, top area, and declining phase.

For long trades, Brian correlates the long and intermediate time frames of choice by insisting on a Stage 2 (i.e. trending) phase in the long term chart, while anticipating entry when the intermediate chart changes from Stage 1 to Stage 2. For short trades, he looks for Stage 4 in the long term chart, and Stage 3 converting to Stage 4 in the intermediate chart.

In other words, Brian tells us to invest with the long term trend when the intermediate chart says that trend is about to resume from a recent correction. Sage advice.

There's a lot more to Brian's book than this general overview. I highly recommend it. For those of you have Brian's book, you might check out the Weinstein and Elder books for more discussion of time frame correlation and the four stages of the price cycle.