When it’s time to take a flight, you don’t just drive to the airport on a whim.
You first need to know when your flight takes off. Then, there’s the time you have to be at the airport for security and baggage checks. And finally, there’s the travel time you need to get to the airport.
In other words, for you to be on that flight, you need three timeframe references: Time for take off, time to enter the airport, and time to get to the airport.
Similarly, day traders, including scalpers, swing traders, and position traders use the rule of three in multi-timeframe analysis to find the right entry points.
Let’s explore this in detail.
What Is Multi-Timeframe Analysis?
Multi-timeframe analysis involves scrutinizing the same asset on varying chart durations—such as daily, hourly, and even 5-minute charts—to capture how price action unfolds over different periods.
- Longer timeframes, like daily or weekly charts, reveal the primary trend and overall market sentiment.
- Shorter timeframes, such as hourly or 15-minute charts, provide insights into immediate price movements and pinpoint potential entry and exit opportunities.
Why does this matter?
A layered approach brings depth to market analysis by highlighting significant support and resistance levels that might go unnoticed on a single chart. The approach also allows day traders to contextualize short-term fluctuations within a broader trend.
The Relevance of the Rule of Three
Recall the example of the airport trip. We needed the three time points to hone in or “triangulate” our flight.
Similarly, the rule of three is about triangulation: Using three distinct timeframes to triangulate trading opportunities.
This approach balances a high-level view with detailed, quick-action insights. Typically, the three selected timeframes span from a broader, more strategic view to a detailed, immediate perspective.
When signals, such as trends or key support and resistance levels, converge across all three timeframes, the resulting confluence is often a strong indication of a reliable trading signal.
By aligning insights from different temporal perspectives, the rule of three makes an asset analysis more robust, compared to relying solely on one timeframe.
The Power of the Rule of Three
Why is the rule of three so powerful? It’s because the rule can confirm trends and refine trading decisions. It:
- Rules out market movement anomalies: When a consistent trend is seen across all 3 time frames (e.g. daily, hourly, and 5-minute charts), it boosts traders’ confidence.
- Finds significant support and resistance levels: Day traders find that levels appearing on multiple timeframes are often stronger and more significant than those visible on a single chart.
- Finds precise entry and exit points: Pinpointing them on a shorter time that align with broader trends on longer timeframes.
- Limits common trading errors: Nips impulsive trades in the bud that are based on short-term noise and not real trends.
In essence, the rule of three is about confirmation: If you base your day trading decisions based on three different timeframes that tell you the same thing, you’ll be making a more confident, smarter decision.
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Understanding multi-timeframe analysis and implementing the rule of three (as we’ll see in the next section) isn’t easy. It takes time and practice, and the room to learn from mistakes.
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How To Use the Rule of Three for Different Trading Styles
There is no universal answer to the best combination of timeframes a trader would adopt, because different traders use different trading strategies.
In other words, scalpers, day traders, and swing traders will all use different timeframe combinations.
Scalpers: Short-Term Timeframes
For a scalper, the ideal combination is 30-minute, 15-minute, and then 5-minute charts. A trader using the 1-minute trading strategy, could highly benefit from a combination that moves 15, 5, and 1.
Day Traders: Intraday Timeframes
For day traders, an ideal combination can move from a 1-day, 4-hour, and then 30-minute chart.
The daily chart will show the primary trend, while the 4-hour chart will help to confirm the initial trend. Finally, the 30-minute chart will help traders execute the trade.
Swing Traders: Holding Trades for Days
Swing traders tend to execute trades on the 30-minute or hourly chart. As such, a potential combination can move from daily, to 4-hour, and hourly chart.
Still, it is recommended that you spend a lot of time testing several timeframe combinations to see those that work well for you. At times, you don’t need to stick to the rule of three. Instead, you can decide to use four charts, for instance.
Triangulate Your Way to a Successful Trade
Just like we need three timepoints to plan a trip to the airport, so do traders rely on the rule of three while performing multi-timeframe analysis.
By confirming trends, reinforcing support and resistance levels, and optimizing entry and exit points across three distinct timeframes, traders can cultivate a more disciplined and confident approach to the markets.
As every trader’s style and preferred asset differ, it is essential to experiment with various timeframe combinations to discover what best suits your trading strategy.When you join Real Trading’s structured learning program, you can test and find your own strategy. Because at Real Trading, every trader is set up for success.
