triple-timeframe-analysis-and-construction-of-structural-framework-support-and-resistances

Step1 :- Triple Timeframe Analysis and Construction of structural framework Support and Resistances…

Hello readers,

By now , you know

What the structure is,
What are Support and Resistances,
What are Pivot highs and Pivot lows
What is a Trend, Three possible directions of trend and Trend violation Pivots?
If you are clear with the above 4 points, you are ready to hit the charts. How will these be identified on a chart? How can we use them to extract profits out of the markets? Before going into the details of the above two questions, first, let me talk about the different charts you need to perform your analysis. Here, I mean charts of the same stock in different timeframes. I assume that you have gone through all my previous posts and are clear with the concepts. If you are clear with them, let’s get into the meat of the analysis. 🙂

Triple Timeframe Analysis

As the heading clearly suggests, I use three different timeframes to predict the high probable future direction so that I can take decisions depending on that feel. Look at the screenshots of my charting platform, so that you can understand what I am trying to say.

When I am not in trade and waiting for an opportunity, my screen looks like this.

Once I entered into a trade and am managing it until the targets hit, my screen looks like this,

I have arranged them like this as I find that it is easy for my eyes to centralize my focus on important information so that I can interpret it fast. You will find what suits you best at different environments once you start trading live.

Each timeframe has its own merit in my strategy. As per the ytc price action trader book, Lance names these three timeframes as,

Higher Timeframe
Trading Timeframe
Lower Timeframe.
As per my previous post on the timeframe, you have to decide the timeframe you trade as per your decision making speed. Its always better to start with the larger timeframes, as you get enough time to make a decision. You can jump to smaller timeframes once you are comfortable with the process of interpreting the information fast and taking decisions accordingly. This is how I use these three timeframes-

Higher Timeframe – To define the structural framework of support and resistance. I use the hourly chart(60minutes) for it.
Trading Timeframe – To identify the trend and Low risk High probable (setup) areas on the chart. I use a 3minute chart as my trading timeframe.
Lower Timeframe – To fine-tune the analysis and to find better entries and exits. I use the 1-minute chart as my lower timeframe.
You can choose higher, trading and lower timeframe as per your convenience. Chose the trading timeframe as per your decision making capability, maintain a factor of minimum 6 in determining the higher timeframe, maintain a factor of minimum 3 in determining the lower timeframe. If I were you, new to trading, I will choose Daily as my higher timeframe, Hourly as my trading timeframe, 15minutes as my lower timeframe. This strategy is applicable to all the timeframes and all the markets provided they have enough liquidity to enter and exit the trades smoothly. Just remember the above points. You will understand everything once we go into the details.

  1. Defining the Structural Framework of support and resistances

Recall the two principles I have written while explaining the structural framework,

Price moves in a structural framework of support and resistance.
If the framework is broken, price moves to the new framework of support and resistance using the concept of polarity change of support/resistance.
You can find a clear explanation of the above points here if you want.

So, we need to draw the support and resistance lines to define our structural framework. It is the battlefield that we are going to lay our plans to make a profit. Define the battlefield, wave the plan as a spider web inside that battlefield, let the losers fall into the web we have made, then attack them to make your bank account fat. This is how profits are made. We are at the first step, i.e defining the battlefield.

Drawing Support/Resistance Framework

Every pivot is potential support or resistance for the future price movement. We are using higher timeframe to define our framework. As per the ytc price action book, you have to consider all the swing highs and lows as structural support and resistances. I have modified it slightly with my observations, and you can use whatever works for you. First I will explain what’s written in the book and later I will explain how I define the framework in my trading. Its always better to draw two supports and two resistances below and above the current price respectively. The more recent the levels, the more effective they are. So start from the right on the chart to draw them. Look at the following image and the explanation of how they are drawn follows.

framework

Step 1 – Open your higher timeframe chart. 60minute chart in my case.

Step 2 – Identify the current market price, here it is 3638.

Step 3 – Identify two recent pivot high/lows above the current market price and two recent pivot highs/lows below the current market price. Here pivots are at 3671,3698 which are above the current market price, and at 3614,3546 which are below the current market price.

Step 4 – Draw horizontal lines at those points. Then the final figure looks like the one shown in the above picture.

You are done with the framework construction. 😀 Open the trading timeframe (3minute chart in my case) with those levels drawn on it. This is how it appears in my 3minute chart after drawing those levels in it.

framework1

Look how price moved to a new framework when the old framework is broken to the downside and how the broken old framework support becomes resistance in the new framework. Remember, these are levels, not fixed points.

While skimming through my trading journal ( I go through my trading journal once every week in search of improvisation in my trading), I found that some Support and Resistance levels are not effective. Started my research to identify the effective levels in defining the market structure. My results got improved by modifying the above process slightly. I will explain that below-

How I am defining the market structure in my trading

Before moving into the real-time charts, I will explain my procedure with the help of the image I have prepared. Have a look at it below

structure

As per the book, I need to draw the support and resistance line at all the pivots, i.e at 1,2,3,4,5,6 and 7. But I only consider the points 2,5 and 6 as valid supports. The procedure to draw them is explained below-

Open your higher timeframe chart.
Mark recent pivot highs and lows on the chart. Here pivots 1 through 7.
Identify those pivots, the movement from which has broken the previous pivot of opposite polarity.
Look at the above figure. Point 6 is a pivot low. Then identify the previous pivot high which is point 5. Look whether the swing on the right side of point 6 has broken point 5. It does in this case. Then point 6 is a valid framework S/R.

Point 5 is a pivot high. Then identify the previous pivot low, which is point 4. Look whether the swing started from point 5 has broken point 4. It’s broken, it is a valid S/R.

Point 2 is a pivot low. Previous pivot high is point 1. The swing started from 2 has broken the point 1 level. Hence 2 is a valid S/R. Now, look at point 4. It is a pivot low. Hence identify the previous pivot high, which is point 3. The swing started from point 4 didn’t break the point 3 level. Hence it is not a valid S/R. Point 3 is a pivot high. The previous pivot low is point 2. The swing stated from point 3 didn’t break the point 2 level. Hence point 3 is not a valid S/R. The above process seems tough, but it is not. It is very easy if you understand how those levels are drawn and practice them on your own.
The first process seems easy but I recommend you to follow the above one, as I have found that the results improved a lot with the second approach.

This is how it looks when we have done this procedure on the previous higher time frame chart.

framework2

Practice. Practice. Practice…. It just takes me around 1 minute to define the structural framework now. You can do it if you practice drawing them on your own.

Our battlefield is now ready. We have to lay the plan inside that battlefield to bring profits into our account. You will learn it slowly.

Have a good day.. 🙂

Update:-

Check out this article for a detailed explanation about the updated procedure of defining strucutural framework.

User says:
I have been studying this article over and over again. Especially defining the structure as per your methodology. I finally understood how to do it easily and faster.

Here is the technique we can use (Please correct me if I am wrong)

On every pivot point, place your finger (or focus your eyes). There are two legs going out from every pivot point.
If the right side leg is longer than the left, then it is a valid pivot point. Simple!!

Hope this makes it easy for the readers to draw valid pivots.

Reply:
One thing. This might not always be true. What if the slope of the swing on the right is less and it extends longer than the swing on the left without breaking the pivot? Your approach will give wrong lines then.

User says:
I didnt understand.. Could you please draw it and show..

Reply:
Suppose the left swing is a sharp rally and the right swing is a bit shallow. right swing can have a length greater than that of the left one without breaking the pivot. If you consider the price difference between pivot high and the low as the measure, you are right with the approach.

User says:
Please correct if I wrong . as per my understanding
After plotting Pivot, If Pivot change POLARITY, is only considered. it means only those pivot consider which break its previous high/low.
I am correct?

Reply:
Exactly. If you are validating a pivot low, the swing started from this low must break the previous pivot high.
If you are validating a pivot high, the swing started from this high must break the previous pivot low.

User says:
Thanks again for the wonderful information that you are providing throughout this KBase. This is highly recommended for both newbies and experts. Looking at the images/charts/commentary for each, I can understand how much of your valuable time you are spending on this wonderful Knowledge Base.

I have a question regarding this article. Nothing to hurry. When you have spare time, please reply to this.
I am facing an issue using the LTF. Since I am using this methodology in very liquid NSE FnO scrips, I find using LTF, either I miss the move or if I get a fill, then do not trust the move. Till what point of time you use LTF? If you know, is there a way to completely avoid LTF and use only TTF & HTF? I may be very slow or scared or both or maybe I don’t know how to use the LTF effectively to overcome this situation.

I hope you understood my query and is making some sense.

Reply:
Regarding your query, you don’t need to use LTF if you don’t find any value in it. I am avoiding it too these days. I trade 7 hours every day and I just look at LTF not more than 10mins. I am using it only to draw levels for PB and not for anything else. My stats got better with that. TTF and HTF are good enough to trade.