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Revisiting Basics
  • : April 11, 2021
  • : B. Krishnakumar
 
Revisiting Basics
 
Let us revisit the basics of how price moves across multiple time frames, especially in a trending environment. As a student of technical analysis everyone is aware that an uptrend is defined as a sequence of higher highs and higher lows and a downtrend is defined as a sequence of lower highs and lower lows.

Have you ever thought about how a trend plays out across multiple time frames? Breakout and momentum trading is extremely profitable when the trend is in sync across multiple time frames. The problem arises when the trend is not in sync across time frames. This is when you will typically see a whipsaw phase where you will face drawdown as a trend follower.

et us focus on the trending phase and understand how this manifest across different time frames. Let us consider Bajaj Finance as the case study. You can of course check this out in any trending stock or instrument.

We will be focusing on the strong rally witnessed during April 2013 and March 2020. During this seven-year period, the stock rallied from about Rs.150 to Rs.4,830 which is almost a 30-fold rise.



If you notice, in any trending phase, the typical configuration in a Renko chart would be:

 
  • Price is trading above the 20-EMA & the 40-EMA.
  • The 20-EMA would be above the 40-EMA.
  • Price will run away from the EMAs and pull back to it.
  • This cycle occurs across all brick sizes or time frames.

With these characteristics in mind, let us look at the Renko chart across multiple brick sizes to understand the interplay of trend in different time frames.

Let us shift focus to a smaller time frame using a 1% brick size Renko chart. In this chart, we will focus on the portion where the price witnessed a steep correction towards the MA in the 3% chart. This happened between October 2016 to December 2016. Here is the chart.


What came across as a deep pull back in an uptrend in 3% brick size is captured as a trend reversal in the smaller brick size or smaller time frame. The bearish sequence of lower highs and lower lows played out in this pull back and there was a bearish moving average crossover too.

If you look at the same price action in even smaller time frame, you will notice a downtrend, may be an uptrend in between and then a downtrend again. Did you also notice the pull back to the moving average playing out in this brick size too? There were three pull backs to the moving average during the uptrend from Feb. 2016 to Oct. 2016.

The purpose behind this exercise is to direct your attention to the similarity between how price behaves across multiple time frames. The pull back to MA and higher highs and higher lows pattern are typically characteristic in am uptrend.

This may sound confusing if you are relatively new to markets. But have a look at multiple charts to get an idea about the overall context of where we are in the trend.
You may be wondering how this can be used this in trading or investment. We will take this discussion forward in the upcoming newsletters. Stay tuned.