In this article, we shall explore the “mystery” of price fractals: how to avoid getting confused by price fractals, how to use price fractals to your advantage and why you may not want to consider them at all.
First things first: remember that all time frames, from the monthly down to the 1 minute chart, are only different ways to see the same movement. If you're on a Eur/Usd chart, then whether you look at a 1min chart, a 1H chart or a 1Month chart you cannot change the fact that you are looking at Eur/Usd. It's always the same asset, just that you have the choice to view how it moves close up (using smaller time frames) or further away (using larger time frames). So it's like a “zoom” feature on any camera: you can zoom in and zoom out, but remember that you're seeing the same thing in different ways.
There is another “feature” of charts that can be used as an aid or as a “compass” if you like. It's the fact that the market reacts to support & resistance or swing highs or lows in the same way on all time frames. That's why horizontal lines are my preferred “weapon” when stalking price action: it's a common denominator that allows me to keep my bearings on any time frame I choose to interact from.
So if you tie together the fact that the market shows a similar behavior at certain key areas of the chart with the fact that as traders we are trying to predict future behavior, it follows that we have a powerful “map of reality”. Would you agree?
Before deciding to “zoom” in & out from the markets, it is a good practice to choose one favored time frame around which you base your “background work”. As we have seen in the previous lessons, each trader makes up the “rules” to interpret their “map of reality”. In order to define our primary time frame, we must take responsibility upon us and decide what our objectives are going to be. Are we looking to hold a trade for the next week, the next day, the next hour or the next few minutes? This will depend on our approach (longer term swings, shorter term momentum, scalper, etc.) which – in my experience – also depends on the personality traits of the trader. It's rare to meet a trader that can swap hats and go from being a scalper to a position trader. It can be done, but before even attempting to try that out, it's imperative to find you “sweet spot” in amongst all the other professional coin flippers you're up against.
Whichever time frame you choose, that's where you start. You define your “trend” from that time frame. Trade well using 1 time frame. Once that's done, you can allow yourself to try and combine time frames. Below is my interpretation of recent developments on the Daily Eur/Usd chart:
As you may have noticed, there are distinct components to my personal interpretation of the daily chart at hand. I try to identify the turning point where downside pressure gets absorbed and nullified by buying pressure, changing the trend on this time frame. As of that moment I know I can either enter upon the breaks of subsequent momentum points (as long as the momentum in the move doesn't fade) and/or wait for the impulse move to fade and attempt to get seated upon a pullback that doesn't violate prior swing points (or evident momentum points as in the case observed).
We are not yet talking about risk management or position sizing because that's a whole other story that will be covered in the next articles. For now, all we're doing is trying to work our way around a naked chart and find higher probability opportunities from which to engage the market. Let us, for a moment, imagine that our primary (trend) timeframe is the 1H chart:
So as you can see, the fractal nature of the markets gives the trader a multitude of choices and opportunities. You can start your planning from the time frame you prefer, because they all show the same traits. What will change are the objectives that each time frame will allow you to obtain.
A big trend on the 1h chart may be a range on the daily chart. A pullback on the daily chart may be a change of trend for the 1H trader, and so fourth.
Bottom line: To not loose your bearings in amongst all the various agendas that play out in the markets every single day, you must have very clear in your mind what your personal objectives are and find the time frame that suits best those objectives.
Once you can trade well from your primary time frame, you may want to explore a combination of 2 or more time frames. Do this only if you have your primary time frame trading method well structured and can execute it blindfolded!
I personally use multiple time frames for a couple of reasons: they can help the trader leg into momentum moves of his primary time frame, using smaller time frames to help him; they can help the trader assess his background structure even better, using larger time frames. It gets to a point where the trader can actively flip across all time frames at any moment, in order to gain insight on what's playing out in front of him. Why limit your field of vision, when you have the chance to use all the various perspectives?
Just remember that the higher time frames do carry more weight because they represent a larger number of hours of transactions. So if you see a large wick on a daily or weekly chart, that wick has been created after many hours of transactions and the market has very clearly stated – over a longer period of time – that some price is unacceptable. But just because the higher time frames represent a larger number of transactions, it doesn't mean that you must only use the higher time frames to trade and plan your strategy. In fact, the lower time frames all the way down the ladder can assist you in managing your risk while adhering to your objectives, finding tighter entries or creating opportunities to add to a core stake.
But if you don't choose a primary time frame from which to decide your view of the trend, and decide your objectives, the multitude of time frames will only get you lost!