I saw a nice entry early this morning based on yesterday’s market action. Linda Raschke calls it Three Little Indians, but my setup also requires a DIVERGENCE on the last peak and there wasn’t one on my 3-minute chart. But looking over at the 15-minute timeframe, there was the divergence I wanted.
So I entered the trade. From the 3-minute chart. And was stopped out. Oh well, sometimes a good trade takes a second entry. And sometimes the second entry gets stopped out too.
My trading plan doesn’t call for third entries, so I watched as the market moved down to my target. The losing trade doesn’t bother me nearly as much as having made a basic mistake — mixing up time frames.
Knowing what is happening on a time frame above and below your trading chart is important, but each time period has it’s own patterns. The longer the interval, the farther away the stop will be. This trade worked if taken on a 15-minute chart, but it would required a 3 1/2 point stop, which is more than I will accept while daytrading. But that doesn’t mean I can move the setup to a shorter period just to get a closer stop. And I know that.
Alan Farley, in his excellent book The Master Swing Trader, calls this a Trend Relativity error. “They see their trades in one time frame but execute them in another. This trend relativity error often forces a new position just as the short-term swing turns sharply against the entry.” Sure did, Alan.
Resources: Street Smarts: High Probability Short-Term Trading Strategies
The Master Swing Trader: Tools and Techniques to Profit from Outstanding Short-Term Trading Opportunities
As you say, “Knowing what is happening on a time frame above and below your trading chart is important.” How do you use three timeframes? Do you trade in the same direction as the longer timeframe?
I wish it were as easy as taking direction from a longer timeframe, and some do trade that way. All of my signals come from one timeframe (usually a 3-minute chart), but I want to know when I am going against a longer term trend. If my 15 minute chart is saying sell, I will only take very clear buy signals, and I will seriously consider passing the trade. I also use the longer time frame to help pick out exit points in a trade. On a shorter time frame I can sometimes find a better entry for a trade, but the trade must be from my regular timeframe.
Thank you for yoyr answer.
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