1 Hour and 4 Hour chart - How to trend trade

Hi guys,

When you are using trend for trading, how do you go about it when the 1 hour and 4 hour chart (or any other chart combination) are going in opposite directions ?

Suppose 1 hour chart is going down, but the 4 hour chart is going up, do you go long or short? Generally how do you read these trends.

Thank you
element

You stay out of the market.

No.

The purpose of using multiple time-frames is to [I][U]reduce[/U][/I] the number of trades you open and concentrate only on higher-probability entries, by limiting them to times at which the additional timeframes’ signals [B]do[/B] agree with the ones from the timeframe you’re trading.

The classic textbook on this subject (from which a lot of the internet chat you’ll see about this subject was originally taken, not always accurately) is Marcel Link’s [I]High Probability Trading[/I] (recommended).

Hi Lexys,

Thank you for the reply …

In demo trading, I observed a lot that two timeframes go in opposite directions…

But another observation is that the higher the frame the less they go in opposite direction (Or atleast it is easier to find them going in same direction, giving more trading opportunities as such) … For example, a minute chart and 15 minute chart might go opposite, but 4 hour and D1 chart are less likely to go in opposite direction. Is this an observation that is accurate ? and is there anything to be learnt from this ?

Thank you …

Yes, it is.

Good question. Yes, I think there is. The faster the timeframe, the lower the signal-to-noise ratio (“SNR”). Meaning that the shorter the periodicity of collecting the ticks into bars/candles, the greater (proportionally) the amount of more-or-less random movements that don’t mean very much, and that gives rise to a few more “false signals”.

One of the things that illustrates is that “trading signals”, however you’re deriving them from charts, i.e. whatever system you’re using, are more reliable on higher timeframes. Trading [I]methods that work[/I] from higher timeframes gives more reliable signals than trading from lower timeframes. Most systems with entries predicated from technical analysis methods will have a higher [U]win-rate[/U] (but of course a lower [U]trading-frequency[/U]) on slower charts.

This also means that the faster the charts from which you trade, the more important it is not to use inappropriately big position-sizes for the trades, because the risk of a losing run is bigger on faster charts.

Note, though, that the fact that “higher timeframes are more reliable” [U]doesn’t[/U] necessarily also mean that they’re more [I]profitable[/I], overall: you have to take both the trading-frequency and magnitude of the price-movements into account, to work out whether or not that’s true. (Example: one of the little systems I trade has a significantly higher win-rate on H1 charts than it does on M10 charts, but I still find it more profitable to trade it from M10 charts because there are so many more trades that way that the greatly increased trading-frequency [I]more than[/I] compensates, overall, for the reduced win-rate. Of course, it takes quite a lot of analysis and testing to determine whether or not this is so, for any individual system/method.)

Trading from slower/higher timeframe charts is more suitable both for (a) people with limited time available to watch the markets and (b) people wanting a higher win-rate even at the potential cost of some overall profit (and that can be a perfectly reasonable perspective, for people wanting to reduce risk at the potential opportunity-cost of reducing profit to some extent, too).

The trend on higher timeframe consist of downward and upward moves of smaller trends of lower timeframes. You should check fundamentals for weekly or monthly trends if they’re strong enough then all inside opposite movements is price retracement (corrections, bounce off) and it could be wise to enter after they exhaust.

When you use 1hr and 4hr time frames (I built my strategy around them), you should consider 4 hr as the pattern chart (where you look to for trade bias) while 1hr is the trigger chart (where you take orders). This creates a platform in which one can set extremely tight stops which are relatively small compare to the potential profits.

I often look out for patterns on 1hr that conforms with what one on 4hr signals. I call them sub patterns --pattern inside a pattern – like symmetry triangle (obvious when chart was read on 1hr) at a significant side of a demand channel (when chart was read on 4hr).Athough there will be times wherein you will have conflicting signals on 1hr, you should always go with the one that is in conformity with 4hr. That way, you would risk little for a reasonable potential profit.