Tuesday, January 27, 2009

Charts -- Double Tops, RSI, Multiple Time Frames

Many, many people will advise against the use of the one-minute chart. And there are plenty of good reasons for such advice, the main being that the one-minute chart has tremendous amounts of noise, is choppy, and encourages overtrading. I agree with all of those points. I would never recommend trading solely from the one-minute chart unless you can mentally compress it into a five or fifteen minute chart (yes, you'll receive an edge from this madness). If you think of every five or fifteen candles on the one minute as a single candlestick, then you can obtain the same level of perspective (which provides stability and less noise) while still being able to see how those candles on the five and fifteen minutes were formed. On this chart it is much easier to see the descending support on the one minute than the five or fifteen (I took the screenshot two weeks or so ago and do not have the five or fifteen). I nearly always give the benefit of the doubt to the larger trend, but sometimes it is nice to see what the underlying trend is in order to supplement your knowledge of the five, fifteen, or longer trends.

This next chart is full of all sorts of patterns, as well as a sample of a hedging strategy (I wrote a little about this several posts ago). The main patterns are the double tops that form at least twice. One thing to look for when determining tops or double tops is the RSI. While the RSI can theoretically stay above the 70 point for an extended period of time, on the longer timeframes it typically reverts to the mean (50) fairly fast. Shorting near the peaks, or after the RSI fails to make a new high can be profitable or at least a nice compliment to an already solid system.

The more I have been playing with RSI the more I appreciate it. For more information of the empirical nature, check out The Dogwood Report and Woodshedder and more specifically Dogwood's post Wealth-Lab Developer 5.1 Experiment" and Woodshedder's post "Depressed Relative Strength: Bulls Have the Edge".


suchen said...

what are your thoughts on trading of TICK charts?

What time frames do you usually trade from on the ES?


Complacent Panda said...

I haven't traded the ES yet. These charts are forex charts (EURUSD). With the ES I think (although I don't know from experience) that you have access to volume information. In that case trading Ticks might be beneficial, although I think you'd probably get more out of the 5, 15 and daily if you're a beginner.

When I trade most anything, my favorite method is to look at the daily first, marking any locations where there may be resistance or support, I circle patterns and look at volume (if it's available). Then I move to the 15 and see if it is coming to any of the areas I marked on the daily (sometimes I'll even look at the or 1hr first, but I tend to skip it because I like the faster time frames). I'll mark some of the resistance and support areas I find on the 15 and then move onto the five. I do the same thing here. I then compare. If any of them match in probable direction, I'll give that a go. If not, I may do a few short term trades or setup limits and long term entry points.

That's my basic routine.

Oftentime before I put on a trade I'll look at the one minute just to get a closer look at the "heart beat" of the market.

I like using multiple time frames.

Hope that helped and didn't overwhelm you too much =)

Woodshedder said...

Greetings Panda!

Thanks for the shout out. I think that the rally that looks to be developing in the AHs market tonight may push us back into extended RSI2 territory. I think tomorrow is to early to get short. I'll be looking more on the short side Thursday.

Trader-X said...

Interesting post...I like what you said about mentally compressing 1-minute candles into 5 or 15-minute candles. I actually do this with 5-minute candles, compressing them into 15-minute candles.

Dinosaur Trader said...

I use 1 min charts for bollinger band levels only, but time most of my purchases with the 5 min or 15 min.


Complacent Panda said...

Sorry for the late reply, I'm still getting used to my new schedule.

Woodshedder, you're welcome! I can't get enough of the statistical analysis and backtesting. Thanks for your thoughts on the market too.

X-Trader, thanks for post. Glad you use a similar tactic. I find that you can have two of the same five-minute or fifteen-minute candles (and this works especially well on even longer time frames) and depending on what took place inside the candle you can make a more accurate conjecture. Not all candles are the same, even if they appear to be so.

DT, yeah. I never purchase based solely on the one-minute chart anymore (I used to give it a go). If I'm not ignoring it I combine it with others. Just using the one minute gives off all kinds of flaky signals. Good idea with the bollinger bands, though.