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TIME FILTERING

The parameters given thus far have been rigid and well-defined to keep things simple. This does not mean that the parameters are inflexible. Experimenting with time filtering, for example, is always an interesting, if not necessarily rewarding, endeavor. Time filtering uses similar systems to locate similar signals within different time frames. Once located, these similar signals attractively increase the probability of trading success.

In general, weekly charts are almost always more important than the daily charts because the weekly charts are composed of greater time and trend duration and, therefore, much larger price moves. However, daily price action takes on greater significance than the weekly when the daily price action has the potential to create a high reliability pattern. A congruence between the weekly chart and such a significant daily chart relays a strong trading signal.

Consider the pattern on Figures 8 and 9, which depict the weekly and daily charts, respectively, of the March 1994 cocoa contract. Both focus on the same time frame with similar results. Examine the daily price chart during the November 16th through December 6th time frame. The market was continually unable to follow through after a new high for the range was established; each successive new high was followed by a setback, and each setback looked as though the market had consumed too many buyers the previous day and was sitting back to digest them. If this type of market action were to continue, the weekly stochastic had a very high probability of showing the formation. The weekly stochastic paused in the overbought area above 75, vulnerable to rolling over. Thus, a correction on the daily chart would create an ominous formation on the weekly chart.

The daily stochastics gave the sell signal on December 6, five days before the weekly signal took shape. Therefore, a short position was established on the 10th bar of the daily pattern. This position anticipated that the 10th bar of the weekly pattern would probably confirm the daily pattern by not trading out of the highs contained in the 10 bars of the daily range.