Combining Timeframes and Reviewing Market Structure in Silver

Mar 14, 2012: 3:17 PM CST

It can be very helpful to start your analysis with a clean price chart and determine current market structure for whatever you’re trading.

Let’s review the concept of “Market Structure” – meaning basic trend analysis – and see how “Structure” develops on two timeframes with a recent example in Silver prices.

This lesson/concept applies to all markets and combinations of timeframes – just adapt to your chosen market.

First, the Hourly (higher frame) Structure:

Let’s start with the most basic, textbook definition of “Price Structure.”

We assess the progression of Swing Highs and Swing Lows to quantify “Structure” of a trend in motion.

Specifically, an UPTREND develops from a series of higher swing highs and higher swing lows, while a DOWNTREND similarly develops from lower swing highs and lower swing lows.

To reverse a trend in motion – on any timeframe – price must reverse the sequence of highs and lows in motion – forming a new low and new high to reverse a prevailing uptrend.

We look to the point at which price breaks the new lower low (in an uptrend) as the official Reversal Price – which is seen near $34.50 on March 5th in the chart above.

The transition period – where price is forming a new low and a new high – is the “Gray Area” or Transition Zone where price can either continue moving higher… or else continue on to trigger an official reversal (by breaking under the newly established price low).

In Silver, we see the First Lower Low near $34.50 around March 1st; a First Lower High just shy of $36.00; and the official “reversal trigger” under $34.50 on March 5th.

From there, price continued moving lower in a Structural Downtrend on its Hourly Chart, leading to today’s sharp sell-off.

There’s a common question regarding “Which Swing Highs and Lows do I C0unt?” when determining structure.

The easy answer is to count the most significant swings, not counting every squiggle in price, which gives a more stable definition of Structure.

However, if you have doubts, you can always drop to a lower frame to quantify structure there, but always in the context of the higher frame.

Let’s see a corresponding “Structure” Chart of Silver during March’s Hourly Downtrend Period:

What happened?!

From March 7th to March 12th, the lower 15-min intraday chart of Silver completed a Full Structural Trend Reversal.

I labeled the corresponding swings accordingly.  Notice that there are many more “Swings” to label on the Lower Frames – and that’s exactly the point.

If you dropped down to a 1-min chart, you would have EVEN MORE swings for you to label.

The key is to pick a main timeframe and then use lower timeframes to clarify any questions regarding Market Structure.

For example, if you were looking to short-sell a retracement up in the context of the newly developed Hourly Downtrend, you might have waited for Silver to complete a Structural Trend Reversal on the lower frame – this would have occurred on March 12th or 13th depending on your risk tolerance (aggressive or conservative).

Price continued its 15-min Official Trend Reversal in the context of the Hourly Chart established Structural Downtrend.

Without going into too much detail, that’s one way to use two timeframes in combination – to assess changes in structure and find better spots to enter or place stops.

Look for the lower timeframe trend to reverse FIRST in the context of signals that you’re trading from the higher frames.

To review prior posts on “Market Structure,” feel free to read the following for more background:

“Reviewing Market Structure and Reversals” (important post)

“Market Structure from January 2012″

“The Importance of Understanding Market Structure” (Mike Bellafiore)

“A Lesson to Learn from the 2010 Range Breakout” (Sideways Structures)

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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Comments
  • ajay

    Excellent input(s).

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