PROGRAMACIÓN DE OBRAS E INVERSIONES

Many years ago I took my wife and daughter of three hiking down a path in the Skyline Mountains in the eastern part of the United States to see a waterfall. At the time it seemed like a good idea. The path was nearly three miles long, but was an easy walk. Of course, the wal k to the falls happened to be all downhill and so when we attempted to return the walk became an uphill climb and a much more difficult task, especially with an exhausted three year old who had to be carried. The real problem arose when the sun started to set and darkness started to cloak the markers that marked the path we were walking on. There was stil l some l ight in the sky, but the denseness of the forest kept most of that light from illuminating the trail making the path impossible to fol low. Even the trees became a blur of shadows. All we could do was to keep walking and hope we were going in the right direction, extending our hands out to prevent us from walking into a tree. Fortunately for us we managed to find a fire road (a pathway cut through the forest to limit fires and to allow access for equipment) and we were then able to find our way back to the main road where we were parked. Because of the width of this access road there was no mistaking where we needed to go and without trees to block the sunlight we were able to see our way easily. However, I shutter to think what would have happened if we hadn't come across this access road.

The point is that we can sometimes be too close to the trees to see the forest or in th is case, too deep in the trees to see our way out of a dimly lit forest. Sometimes our path can be too small and too unclear to be of use.

Step back and look at a situation from a bird's eye view or find a much

Michael J. Parsons

larger path and your direction becomes much clearer. This is the benefit that larger time frames can bring to the table of trading and can very well be the difference between knowing where the market is going and being lost in the woods.

The big picture reveals what is actually happening within a market, and of course, the strongest forces influencing it. But imagine trying to trade a market using only charts based on weeks, months or even years. The draw down would be so immense that it would make trading unrealistic for most traders, particularly for those with very limited capital. There are times when we need to see what is far ahead in the distance, but who of us can keep ourselves from stumbling when we can't see what is directly under our feet? We would be stumbled by everything in our path. So too, smaller time frames are a necessity if we want to control our risk.

Does it really make that much difference to look at multiple time frames?

Well, would you like to know when a trend will stop, a top or bottom form, or when a market will take off? Higher time frames can actually help you determine when such occurrences will happen and knowing this in advance will make trading much easier and more profitable.

Naturally, we would l ike each and every one of our trades to be a guaranteed success, but realistically that isn't possible. No matter how good a sports team might be no one wins every single point in every game. A team becomes a champion, not by winning every single point, but by winning the most games. If you won more trades than you lost then that would be great, wouldn't it? What if you also won more money on each winning trade than you lost on any losing trade? When you add both positive elements together in your trading and are able to repeat this process consistently, the results are substantial profits. This is the ideal that you are after in trading, plain and simple. For this scenario to be a reality you need to consistently find low risk and high return trades where the odds are substantially in your favor. Most think this is an elusive dream, but I am about to show you how to actually do this.

By applying multiple time frames to Channel Surfing the trades are dramatically improved with lower risk and higher return. Trades are not only more frequent winners, but winning trades will have much greater profits and losing trades will have much lower losses. The profit/loss ratio widens and even gaps in your favor. Multiple time frames are a primary factor that elevates Channel Surfing to a whole new level, the level you want to be at.

Channel Surfing

Before we go any further I need to clarify a term I am using here. Although I use the term multiple time frame, the more accurate term is actually multiple time span. A time span is simply defined as a period of time or data. A chart may have several usable time spans showing on the same chart. What is of importance are the patterns that develop and define the specific channels, whether you are looking at a single chart or charts derived from various time frames. For example, if I were looking at a daily chart that has a channel covering a one-week period then this would be one time span. I might also notice a channel that covers a period of one to two months and overlaps my one-week channel, which would be an example of a higher time span. Both of these channels may be visible on the same chart and time frame, but they are still distinctly different views of market activity. A weekly chart, which would be an entirely different chart, may show a channel covering a six-month period that encompasses the other two channels. This would be an example of using multiple time frames to accomplish the same thing as we did with the two time spans found on a single chart. The important factor is that a larger channel is found that encompasses the smaller channel and this is used in our analysis of a market.

Even though the terms multiple time frames and multiple time spans apply, the term multiple time frames will be used interchangeably for both. So don't be surprised or confused by the use of this term even though we may actually be dealing with two separate channels that appear on the same chart. Although a different time frame will be used through most of this chapter to prevent confusion it is not necessary that you actually have a different time frame to accomplish what is being demonstrated. As a general rule, the larger the channel the greater the impact it will have on a market. But in using multiple time frames you are not looking for the largest channel available. Rather, you are looking for a larger channel that encompasses your smaller channel and can be used for setting some parameters. This is usually the next higher channel available. Once you determine a larger channel that meets your requirements it is then used in conjunction with the smaller channel which will be providing that actual signals for any entry or exit.

Trading multiple time frames

The concept of using multiple time frames is relatively simple. You determine a time frame or time span that you want to trade and find a

Michael 1. Parsons

prevailing channel to set up your entry and exit points. At the same time you set up a channel in a larger time frame or time span that encompasses the smaller channel to determine the trades with the lowest risk and highest profit potential. Normally this larger channel will be the very next in l ine above the smaller channel, but the essential factor is that both channels be well defined, not next in line.

Once both channels are defined you are then looking for trades that are only in the same direction as the larger channel, not against it. The smaller channel will be used to narrow down your entries and exits in the direction of the larger one. What this means is that you are only trading when both channels are moving in the same direction. If one channel is up while the other is down, then no trade will take place. I n essence, you are requiring both channels to work for you, not against you. By waiting for both channels to line up together you increase the odds that a trade will fol low through with a move in your favor. Additionally, there still is one other requirement that must be met before a trade is taken.

This requirement has to do with the position of price within the larger channel. Earlier, we covered the specifics of how a trend entry was to be made and the requirement of price to be within one-third of the inside channel. I f a market accelerated rapidly then this percentage could be adjusted to one-half. This requirement allowed more room for a profitable move. The same principle is carried over to trading multiple time frames.

However, in this case we are focusing on the position of price in relation to the larger channel. The minimum that price should be is within the one-half range closest to the larger inside channel l ine. But this rule is for an entry only. I f a position has already been taken then you can maintain it until a smaller channel signals an exit. The position of price within a larger channel has no bearing on the decision to exit, unless of course you have reach the larger outside channel line. But once you have exited any position then it is best to wait until price has again returned within the one-half range of the larger inside channel l ine before considering another entry. Figure 7-1 demonstrates this principle.

One of the major objections to these requirements is that there will be no available trade for a large portion of time. While this may be true, the trade-off is that there will be more successful trades, the method wil l be simpler and the rewards more robust then if you just attempted to trade continuously. Remember, there are always plenty of markets available to trade and if one no longer fits the requirements then there will be others to take its place. Of course, you can still return to using just the basic

Channel Surfing

Channel Surfing techniques so that you will have more trades, but multiple time frame setups are the most desirable and should always be your first focus when scanning for new trading opportunities.

Only trade in the direction that the larger channel IS biased toward

In this case. the bias is bullish.

so only a long position is taken

The reality is that markets swing both ways. Naturally, we would all l i ke to start every trade with the least amount of risk. By approaching each trade with this double requirement you have two channels, not just one, working in your favor. While this stil l does not guarantee a profit, multiple channels will multiply your chances of success.

To summarize, the larger channel is used to reduce the risk of any trade.

It has the stronger influence on the market and biases the market in your favor. The smaller channel is used to signal the actual entry and exit of your trades. For any entry, two requirements must be met. First, the entry must be in the direction of the larger channel which means that both channels must be in unison. Secondly, price must be within one-half of the larger channel range, closest to the inside l ine. Exits are determined by the smaller channel only. Aside from these specific rules everything else would be handled just as you have already learned. But this simple addition to the basic techniques brings with it a big impact on the results.

Before I go into any further detail s about this process, consider the reasoni ng behind this approach. We have all heard of the expression.

"The trend is your friend". There is a lot of truth to this expression. By using a larger and stronger trend price tends to move in our favor. This is the part that creates the low risk for our trades. At the same time, none

Michael 1. Parsons

of us really want to endure the extensive drawdown that accompanies the use of larger trends. So to solve this problem we use a smaller trend to limit the drawdown and refine our entries and exits. Remember this expression, "Follow the shadow of the big while walking in the footsteps of the small."

At this point you may be a little confused about this larger/smal ler channel combination. Relax, because I am going to walk you through a couple of trades. Since there are two types of market conditions to consider, trending and trading, we will approach each separately and discuss how each is best traded.

Trending markets and multiple time frames

Of the two, multiple time frames are easiest to apply to trending markets.

I n order to make a profit we need to have price moving up or down in our favor. Trending markets have already shown their bias and so determining the direction of your trade is made that much easier. Despite this, the first order of business is to determine the time frame that you prefer to trade.

I f you are looking for trades that last for six months or more, then there is no need for you to look at channels that appear on an hourly chart. So this determination is based on what your goals and preferences are.

For demonstration purposes, we will consider trades that run from a couple of days on up to several weeks in length. However, the time frame choice is irrelevant when using these techniques. If you prefer a longer trade that lasts several months or just the opposite, trades that last but a few minutes, the methods are applied in the very same manner. In any time frame you settle on you will start by choosing a channel that will fit your preference and be used to signal your entries and exits. Because this first channel is the foundation of all that follows, making a good choice is essential.

A lso, while it doesn't have to be perfect, your time level preference does need to have a habit of forming wel l defined channels. There is a delicate balance here. The average movement in price has to be enough to cover any slippage and transaction costs, so a minimum size is required. But at the same time the channel has to be small enough to keep drawdown tolerable, so there is a maximum to the size you choose. Look at recent trends to find what fits your trading requirements.

Once you have found a channel that fits your requirements you then locate a channel on a higher time frame that encompasses the smaller channel.

Channel Surfing

This will be used to determine certain risk parameters, so obviously this channel must be well defined as welL Again, you are not looking for perfection here, just the ability to easily determine what the limits are.

As you search through the available larger channels you will usually run across more than one to choose from. Each additional channel will offer something more when analyzing the market, so they are worth reviewing.

But for our purposes we are most concerned with using the next available larger channel that is well defined. This will be our main focus, even though you should never entirely ignore these other channels. Remember that the larger the channel the greater the impact on the market. So they will be of particularly importance whenever price draws near to one of these other channel lines.

One question that often arises at this point has to do with the use of the term "well defined". Whenever you have a new trend that is just forming a channel will usually be unclear to some degree. Even larger channels turn at some point. There are of course other situations when finding a well defined channel can be tricky as welL Sometimes it is necessary to step up to the next available channel to find one that is well defined. But usually it just depends on how a person actually looks at a market and how much data they include. A channel that is clear with three months of data may be lost if you only have two months of data. So if you don't see a channel that can be easily drawn, then it is likely that you just don't have enough data showing on your chart and need to go to a higher time frame. A channel requires a minimum of two h ighs and two lows and it should stand out clearly, not be questionable. The key here is not to overcomplicate this by trying to make a channel appear where none exists or where it isn't well defined. You either see one or you don't. There are a few shortcuts to establishing a channel that we discussed earlier, but because a larger channel is used to limit risk it is always best to have the points already established, not estimated.

As long as you have enough data there will always be a channel on a higher time frame somewhere. If you don't see one then it is just a matter of finding it. If you do have problems defining your channels or if there appears to be too many choices for you to narrow them down, then avoid that particular market until you gain more experience in using this method or until that particular market becomes easier to define. These requirements can at times mean that a substantial part of a market's activity is off limits, but again the key here is to keep your risk low. As you develop your skill in using these methods you can adjust your trading to match your risk tolerance.

Michael 1. Parsons

Defining your entries and exits using multiple time frames

So now that you have determined both your smaller and larger channels, what then? In a trending market the larger channel dictates the direction of your trades. I f the larger channel is up then you are only going to buy.

I f the larger channel is down then you are only going to sell. Additionally,

I f the larger channel is down then you are only going to sell. Additionally,