- : November 11, 2020
- : B. Krishnakumar
Trend, Volatility & Inter-Play of Time Frames
We discussed the Pattern Counter feature and some possible ways to use in the past couple of weeks. Before going any further, I wanted to take a break from Pattern Counter and discuss about an interesting concept relating to different market phases or cycles.
We are aware that market moves in cycles or phases. This article will not help you predict the start and end of such cycles. Rather we will try to understand how such phases occur and may be how to deal with it.
As trend followers, we know that best opportunities and stress-free opportunities occur when there is a smooth trend with strong momentum.
Let us look at this scenario where the price is in a smooth uptrend and trading is such a breeze to deal with. Here is the Nifty Futures chart, 1-minute time frame and 0.1% box size.
In the above chart, the price moved up 1,200 points where the trend was smooth and any trend following approach would have helped capture at least 50%+ of this 1,200-point move. The traditional entry & exit methods in Point & Figure would have helped capture bulk of this move without much stress.
These are ideal market conditions for the trend-following traders.
There can be instances where the price moves in a particular direction, but the price move is associated with higher volatility. Such phases are more difficult to deal with because the volatility would shake you out of positions while the price would have moved directionally.
Have a look at the Nifty Futures chart below.
This is a classic example of a directional move but with higher volatility. The above chart captures a fall of 470-points in Nifty Futures that lasted from October 21 to October 30. This is a fall that is difficult to trade using traditional Point & Figure entry and exit mechanism as the volatility would shake you in and out of positions frequently.
In this scenario, there are a few questions we need to ask ourselves as traders.
- Could we have captured any portion of this 470-point move?
- Is it possible to avoid a few whipsaw trades? If so, this would reduce the drawdown and improve the win-ratio too.
In this context, let us try to understand what role timeframes play in such trending and volatile phases. Let us look at this volatile phase in the slightly bigger time frame to understand the impact of time frames in price action cycle.
Here is the same Nifty Futures 1-minute chart but the box size used is 0.25%.
- Is there any way we can decide not to participate in this fall or avoid most trades in this phase? This again will reduce the drawdown and improve the win ratio big time.
Have a look at the 9-day period where the price fell by 470-point, but this move down appears a lot smoother here. Could we have captured some portion of this fall? May be, May be not.
The price action in the above 0.05% box size chart looks relatively smoother compared to 0.1% box size and maybe there were a few profitable opportunities in this box size on an intra-day basis. There would have been fewer whipsaws and there was scope to make some money on the long and short side in this 470- point fall.
Now, if we go to an even bigger box size of say 0.4% box size, the noise is eliminated to a greater extent. So, what comes across as volatile phase on smaller box size of 0.1% comes across as a harmless pull back in the higher box size. Have a look at the chart below.
But, if we can use the inputs from higher time frame, we can reduce the whipsaw in the lower time frame.
Think about this - A volatile phase in one-time frame can be a trending move in a smaller time frame. If this sounds a bit confusing, have a look at the same price action in the smaller timeframe.
Here is the Nifty Futures capturing the same price action in a smaller time frame. Have a look at the 1- minute chart but in a smaller time frame or smaller box size of 0.05%.
I want to wind up this article here and the idea here is to make you think how time frames interact with each other and how the price behaves and get captured across multiple time frames. Before we wind up, pay attention to big bullish anchor column which is also a Bullish 100% Pole.
This bullish 100% pole is the 1,200-point rally that was so easy to trade and was captured in 0.1% box size chart shared earlier in this article.
While the concept of using multiple time frames may sound confusing, once you understand the concept, it would help you reduce whipsaws in your trading time frame. Reducing whipsaws would improve your win- ratio and your risk-reward too.
And, once your win-ratio and risk-reward improves, your expectancy improves significantly. Let me have your thoughts on the same. And hopefully, you can relate to the logic behind the Boost strategy now.
The broader message here is that it is okay to sit out of some phases, especially the volatile ones which can help reduce whipsaws. Realise, you cannot and need not participate in all moves. It is also okay to adopt a method that offers a slightly delayed entry in a trending move, provided it helps you avoid or reduce whipsaws.
Remember, the overall aim as a trader is to improve our expectancy. This can be achieved by reducing whipsaws or trying to capture a bigger portion of a trending move.