Technical Analysis Using Multiple Timeframes
An interview with author Brian Shannon.
I recently had the chance to interview blogger-author Brian Shannon. Brian runs the Alpha Trends website, and has now written a book entitled "Technical Analysis Using Multiple Timeframes."
Adam: My dad once said that if anyone asks you where the market is going, just say "The present trend continues." With so many timeframes though, how would I best define that?
Brian: As ambiguous as that may sound, there is wisdom in your dad's words. I think he was likely referring to the primary (longer term) trend. It takes a lot less energy to sustain an established trend than it does to reverse it. As the saying goes "a trend, once established, is more likely to continue than it is to reverse."
Deciding which timeframe to trade on can be one of the most difficult decisions for traders. The appeal of short term trading stokes the greed in many participants who are not experienced enough to compete in the market on those shortened timeframes. Just as you must learn to crawl before you walk, stand before you walk and walk before your run, you need to master the concepts of trading ,and conquer your emotions, on the longer term timeframes before you can hope to have a chance against much more experienced traders who trade the shorter timeframes.
Adam: What kind of scanning process do you go to to find names to play?
Brian: That is the subject of a chapter in the book that I have been receiving a lot of positive feedback on. Finding stocks to trade is largely a manual process where I filter through a very large list of stocks on the weekend to come up with potential trading ideas for the coming week. The more focused list will typically be close to 100 symbols which will be the basis of my analysis fro the trading week. Each day after the close I will monitor this list (as well as some of the percentage gainers and losers each day) to find what appear to be low risk/ high potential profit trades for the next day.
Adam: Any favorite chart patterns you look for, or that akin to defining porn (you'll know it when you see it)?
Brian: Ha ha, I sense a trap here. I am attracted to the classics, well rounded bottoms and double tops... what was the subject again? Oh yeah, chart patterns, that's what I was talking about. Actually I do not spend much time seeking out patters like; cup and handles, head and shoulders, etc. Instead my analysis is more focused on trending behavior on multiple timeframes and then finding what appears to be a low risk entry level relative to the estimated potential for reward. I find a strong trend candidate on the longer term timeframe and then drill down to shorter term timeframes for more accurate entry and exit decisions.
Adam: Do you incorporate the volatility backdrop in your targets/stops (i.e. widen them in more volatile markets) or is that not applicable to your methodology?
Brian: As market conditions change by becoming either more or less volatile, my primary technique of adjusting risk is through the share size I trade. During heightened times of volatility I will reduce share size and become more selective in the trades I take. I am extremely risk adverse and if I do not perceive an edge I would rather sit on the sidelines and wait for the odds to favor my trend following approach.
Adam: Do you use options at all? If so, as stops (like puts vs.a long stock trade) or as stand alone plays?
Brian: Yes, but I am a premium buyer. In a way you can say I use them to hedge because I try to minimize risk in a directional play where there may be a catalyst present for a large move. As you talk about often, options premiums become inflated before earnings reports are released and there is a certain expected move that gets built into the stock, the question is in which direction? I believe that news and surprises tend to follow the trend, and if options are reasonably priced and there is a good chart pattern present I will make a directional bet on an earnings report with the knowledge that I may lose the entire amount at risk, but if I am right, there could be an opportunity to make a huge percentage gain. Obviously, these are very small positions relative to my trading capital.
Adam: Which is more profitable, calling tops and bottoms or actually making some winning trades? I mean how much can I make on one trade that it's worth more to me than being able to brag about calling the top tick in USO?
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Brian: That sounds like a loaded question... the answer is what I think you would expect, but is opposite of what many participants attempt. I trade to make money. Not to tell people how smart I am. Picking tops and bottoms is a fool's game which is mastered only by liars. Whether the trend is lower in financial stocks, higher in crude oil (or any other market), trends tend to persist much longer than what may appear to be reasonable. Markets do not always trade on logic, emotion is a huge factor and when crowd psychology takes control of a market, some "unbelievable" moves can occur. It is said that the collective intelligence of a crowd sinks to the level of the dumbest participant and, as you well know, there is definitely some "dumb money" in the markets. If you can objectively observe price action and cautiously (respect for risk) trade the uptrend in oil, you will probably profit at the expense of those who endlessly explain why the prices don't "make sense."
Adam: Your book contains terms and what-not that a non-technician (read, "me") can actually follow. Any temptation to just make up complicated sounding indicators? I can do that in options: There are always 20 unused Greek letters. "Hey, watch your Epsilon risk."
Brian: I believe that simple is better. It is funny that I have heard other authors say things like "readers are like mushrooms...feed them s*** and keep them in the dark." I think those are the words of professional authors, not traders, who are insecure about the value they provide. I want my work to provide answers, not create confusion.
Adam: There's a whole chapter here on shorting. Do you have a strong opinion one way or another on the plus tick rule and how it may have effected market behavior? If not, I do have a strong opinion, so can I just state my opinion and say you agree with me?
Brian: I don't really have a strong opinion because the market doesn't care about my opinions so I try to just adapt my methods as rules change. I have noticed that stocks do tend to stay weak longer without a bounce when there is a negative reaction to news. I do think that bearish traders have more influence on short term trends than they did before the repeal of the up tick rule. This is probably bad for public confidence in markets over the long term, but something that can present tremendous short term trading opportunities for aggressive traders who are disciplined enough to put their emotions aside and trade what they observe rather than what they think should happen.
Adam: OK seriously, I have found time and time again that my "shorting" behavior differs greatly from my long (i.e. tight stops that always seem to get elected). Are your short ideas mirror images from longs or do you look for entirely different setups?
Brian: My short sale candidates are actually almost a mirror image of the long trades in terms of what I look for in terms of trend behavior, but my approach is much more aggressive in short sales than longs. As you say, your stops seem to get hit more often in shorts and I have definitely found that to be true so rather than wait for stops to be filled I shorten my holding times and cover quickly into the anticipated weakness. I am optimistic by nature, but very cautious when I risk my money in the markets. A strong defense has served me very well in trading and will continue to keep me in the hunt while others press their offensive positions and blow out.
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