There are many of us who take the Signals provided by a Higher Time Frame and then trade on a Smaller Time Frame in that same direction to get a better entry with a smaller Stop Loss. However, one of the traps of the market is that the signal given by the Larger Chart could be a False Signal, leading us to enter when the trend has actually ended and is about to reverse.
One of the ways to avoid this is by waiting for the smaller time frame to give a signal of its own to confirm the signal of the Larger Chart. If this signal is not given or it is not given within a certain time period, then it means there is a reduced probability of a profitable move – and an increased chance of a reversal.
The Table 7 Chart taken from my Trading Manual reveals how interconnected time frames interact to provide us with Profitable Entry Signals. If a Signal from the Larger Chart is going to lead to a profitable move, the Lower Time Frame that it controls will respond to confirm this within a certain time. If it doesnt respond with a signal, then the Large Time Frame’s Signal is likely to be a False Signal and you should watch out for Sharp Market Reversals!
1. Choose any two interconnected Time Frames.
2. Look for 10 instances when they moved together as part of a strong trend.
3. Look at the Candlestick Signals that were given by the Larger Chart during each of those trends.
4. See how many times the Lower Chart responded with a Signal of its own to continue the trend.
5. Check how long it took for the Lower Chart to respond in each of those instances. How does it compare with the time period given in the table above?
Let me know if you see this relationship.