Referencing the Higher Timeframe Trend
I have a trend following strategy on the 1-hour (H1) timeframe. I've noticed that momentum strength can be influenced by the higher timeframe trend. Before we run through some examples, here's a recap of my thesis on multi-timeframe analysis.
Each timeframe used should serve a purpose. The main "signal" timeframe is the one used to scan for entry signals. This timeframe defines the scanning frequency.
For me, the signal timeframe is H1. This means that I need to scan for signals at least once an hour and the holding period of each trade is expected to last multiple hours.
The signal timeframe should be paired with a "reference" or structural timeframe. This is a higher timeframe to make sure that I'm not trading against the trend. For me, the reference timeframe is the daily (D1). This is crucial.
Let's use an example where price is trading above an exponential moving average (EMA) on the D1 timeframe. On the H1 timeframe, let's say there's an EMA squeeze and price is attempting to push lower. As you can see, there's a divergence of sentiment across timeframes.
This is where not taking the trade, setting a tighter take profit, and/or reducing size will be very beneficial. Here's a few examples using trades where I've observed this phenomenon directly.
GBPCAD: H1 and D1 Trend Divergence
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| GBPCAD Daily |
On the D1 timeframe, GBPCAD is in a technical uptrend. This is defined by price trading above the EMA. Granted, the price action is very choppy.
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| GBPCAD Hourly |
On the H1 "signal" timeframe, price was in a technical downtrend. My take profit was set at 1.5x of risk. If I were to set a take profit of 2.5x of risk, it would not have hit.
EURCAD: H1 and D1 Trend Confluence
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| EURCAD Daily |
EURCAD's D1 chart indicates a technical downtrend. One concern here is how over-extended price was.
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| EURCAD Hourly |