IMPORTANCE OF COMBINING TIMEFRAMES

23 ago 2023

A trader usually works on a strategy that is strictly tied to one timeframe. This timeframe is used to determine the trend direction and search for strategy signals. Alexander Elder proposed to perform additional analysis and confirm the trend movement on two more timeframes of higher order. This technique was first described in his work, called "Elder's Three Screens". Combining timeframes was designed to:

• Increase the winrate
• Improve the accuracy of entries

Alexander Elder suggested adding one more chart with a higher timeframe to the trading timeframe to get an overall picture of the trend and determine its direction. And to look for entry points into trades on the third screen with the smallest timeframe.
Theoretically, the trend matching on two higher timeframes increases the percentage of profitable trades. Moving the strategy algorithm to a smaller timeframe reduces the size of stop-loss and recorded losses.

For example, a trader analyzes the general trend on a daily chart and determines its direction. Let's assume that the currency pair is growing the price is above the moving average MA (200).

According to the rules of the strategy, it is necessary to go to the 4-hour chart and wait for the confirmation of the trend on this timeframe. The currency pair price should also rise above the MA (200).

After the combination of trends on D1 and H4, it is necessary to wait for a similar signal on M15 or M5. Then it will be possible to look for an entry point into a trade to buy according to the strategy.

The practical results of combining timeframes according to Elder's strategy are of little value. Even if the general trend on the daily chart is upward, different price movements can occur on a lower timeframe, for example, on a 15-minute or 5-minute chart.

Despite the global trend of the oldest American stock index, only 50% of days over the last 30 years closed above the closing price of the previous day. It turns out that the ever-growing Dow index has an even distribution of positive and negative days. In the Forex market, in general, we can also expect a roughly even distribution, especially if we take into account the range nature of the currency market, i.e. the accuracy of the Elder filter from the higher timeframes works 50/50. Therefore, relying only on the trend of the higher timeframe is not recommended for intraday traders (day traders). However, if this kind of signal filtering gives you psychological confidence, you can use this tactic. Psychology and emotional comfort are an important component of trading.

✴️ How To Reduce Stop-loss And Increase The Efficiency Of Trading Strategy By Combining Timeframes
There is another approach of combining timeframes in trading, which is found in the works of Tom Dante. This tactic is based on Dante's work and allows you to combine several timeframes using structural analysis of price movement. Instead of simply filtering signals, the trader looks for matching patterns on different timeframes, which can indicate more reliable entry points into the trade.

Increasing winrate and reducing stop-losses can be achieved by using a strategy that works equally well on different timeframes. For example, Price Action is ideal for these requirements. As in the classic Elder strategy, everything starts with analyzing the general trend on the D1 chart. Only the trader is busy looking for support/resistance levels, key candlestick formations and other Price Action signals.

In the example below, there is a level breakout on the D1 chart. If the trader decides to go short, the stop loss should be behind the candlestick high or at the nearest resistance level from the broken line.

Then you can move to the 4-hour chart and look for structural support or resistance levels that can confirm the overall trend. And on the H1 chart, you can look for confirmations to enter the trade in the form of candlestick formations or other technical indicators.

This way, you combine information from multiple timeframes to more accurately determine when to enter the market. It is not recommended to go below the hourly chart if D1 has become the starting point for combining timeframes. A trader can also simplify the combination strategy to two timeframes, for example, D1 and H1.

In the example above, the H1 chart shows a bounce from a broken level, which can be used as a signal to open a short. In this case, the stop loss will be just above the local maximum of the hour candles, which is much smaller than the stop loss on D1.

✴️ Combining the D1 timeframe with H1 enables the trader to:

• Reduce stop loss and increase the order lot;
• Increase profit by using take profit to close the position, which is set on the D1 chart.

Stop Loss on H1 allows you to increase the profit/risk ratio by times when trading on D1. Without combining timeframes, risk and profit would be 1 to 1 or at least 2 to 1.


✴️ Let's summarize the simple rules of structural analysis of the strategy of combined timeframes:

1. Find a pattern on the D1 timeframe
2. Move to H4/H1 and wait for a signal using the same strategy
3. Open a trade according to the rules of the strategy on H4/H1
4. Set Stop Loss on H4/H1
5. Set take profit on D1

✴️ Conclusion
It is worth noting that the proposed strategy will require additional Price Action skills. Searching for patterns requires great attention and patience to wait for confirming signals on each timeframe. However, this approach can improve the accuracy of entries and reduce the probability of false signals. Risk management is the most important aspect of timeframe combinations. When using lower timeframes, you can determine more accurate stop loss and take profit levels based on the higher timeframes. This helps to reduce risk and increase potential profits. Like every new strategy, the idea of combining structural market analysis requires practice on a demo account to find more appropriate trading systems and to practice correlating signals.