07/29/2018 |

TrendSpider Strategy Guide: Multi-Timeframe Analysis with Trendlines

In this TrendSpider Strategy Guide issue, we will be covering one of the core strategies that TrendSpider enables and one of the most popular ways to use the system: Using Automated Trendline Detection with Multi-Timeframe Analysis. 

Theory:

Two of TrendSpider’s underlying assumptions are:

1: Multitudes of distinct and valid trendlines of varying degrees of “strength” exist on the charts of every security on every timeframe at any given moment.

2: Short-term price action is more likely to respond to longer-term trendlines than shorter-term ones.

By making it easier to compare multiple timeframes, TrendSpider enables traders to “see the forest & the trees” to help add a new perspective to their trading decisions.

Additionally, since most retail traders and algorithms only look at one timeframe of data at a time, seeing multiple (with one being longer) provides some additional edge on shorter timeframes.

Strategy Setup:

Many traders choose this strategy naturally and do this analysis by hand. TrendSpider makes it easy by allowing you to automate the process of comparing timeframes as well as the process of identifying trendlines to compare.

1: Start by turning Multi-Timeframe Analysis on by clicking on its icon in the top toolbar. It looks like this:

2: Next, select your primary trading timeframe and select it on your chart. For this example, we will be analyzing and looking for a trade setup on a 5-minute candlestick chart.

3: Then, select a secondary timeframe, one that is longer than the primary, and select it on your chart. For this example, we will choose 60-minute as the secondary timeframe.

Once you have configured your chart, you should see 5 vs 60 in the drop downs on the top left of it, like this:

Note: In this case, we have only one chart open at a time, but you can have as many as you want. Each chart has two timeframes to compare, a primary and a secondary. For this particular example, trendlines are enabled for both timeframes and Manual Tuning mode is turned off.

Pay Attention to the New Annotations on the Chart

When the chart is set up this way, you can see that it looks a little different – more lines and more activity. Note that there are two sets of trendlines on this chart. The solid ones are from the 5-minute timeframe and show a breakdown of the stock price through support.

However, the secondary, dashed trendlines seem to “catch” the stock from freefall. Where did they come from? Those are simply the trendlines from the 60-minute chart – they’re just ON the 5-minute chart to help you see that they are there.

Strategy Explanation:

Breaking down what is happening here requires looking at a few more charts. First, this is the 5-minute chart alone, with no comparison secondary timeframe. You can see that if a trader was only looking at this chart, they may feel very bearish about this stock.

After all, it broke through not one but two trendlines, and then if that wasn’t bad enough, the 200-period moving average failed to provide support as well with a sharp price drop afterward. If you were a short-term intraday trader, you may choose to avoid this stock at this point in time. And maybe you should? Read on…

Here is the next part of the equation, the 60-minute chart alone.

On this chart, you can see that there is some support from an old trendline that has acted as both support and resistance before.

When you combine these two sets of trendlines (which were detected in milliseconds by the software) on one chart, you can see a lot more depth into whats going on and it may help guide how you decide to proceed.

In this example, here is what it looks like zoomed in on that the most recent part of the price action.

Note: These are 5-minute candlesticks sandwiched between 60-minute chart trendlines.

For this particular chart, a trader may decide to wait and see which direction the stock breaks before considering trading it. Using TrendSpider alerts, the system can do this for the trader. Once an alert fires, it is because a 5-minute candlestick broke through a 60-minute trendline, which is meaningful and deserving of the trader’s attention.

Strategy Execution: 

To successfully trade using this strategy, it is important to identify the key timeframes you want to trade, as well as a list of symbols you want to monitor.

Start by configuring TrendSpider and uploading your watch list.

As you flip through, when you see price approaching a dashed trendline, right click on the trendline and create an alert for a Breach and Bounce. Be sure to set the alert up to fire on the fastest candlestick supported in your account.

Generally, where applicable, we create alerts on two trendlines to tell us when stock breaks and which way it goes. Based on that, we sit back down at our desks and dive in ourselves, knowing that since short-term price action is interacting with a long-term trendline, that something is likely to happen. We have created a visual depiction of what this process looks like.

Commentary:

This is more of a timing strategy than a trading system. You still have to decide which patterns and chart setups to create alerts on, and you still have to determine on your own which Trendlines, algorithmically detected or hand-drawn, you want to trust. But if you can master this strategy, you will have a leg up on other traders who can only see one timeframe at a time, and a leg up over one is a leg up over many.

Good luck out there! Invest wisely.