Multi-Timeframe Analysis on Stocks and Currencies Market
Disclaimer: Anything written in this article is not representing a recommendation to buy or sell stock. The decision to buy and sell stock for any purposes is fully on your risk.
Overview
This weekend, I try to be productive and give one thought about my thoughts on the subject of Multi Timeframe Analysis on Stocks and Currencies Market.
The basic lesson from economics about transactions is that price movements occur in a balanced way to achieve an equilibrium point that occurs due to supply & demand. The problem is, that many of us still think that price movements occur randomly and without patterns. Many of us are trying to solve or find out about what patterns occur in the stock market to be able to predict and understand the character and behavior of prices, to maximize profits.
For 5 years I have been trying to study the pattern of price movements in the financial market/foreign exchange market (forex). Price behavior in financial markets occurs in pure balance because these transactions involve countries and the market size is so large that no one can influence the market. As a result, price movements that occur are purely controlled by market mechanisms.
This is slightly different from the Stock Exchange, because of course in terms of market size, the stock market is much smaller than the financial market because it only covers the stock market, and there are far fewer market participants involved.
However, starting from this concept, I want to try to apply the forex analysis method to the stock analysis. This will also lead us to find out whether it is true that everything that happens in the Stock Exchange purely occurs by the market mechanism, or whether the transaction can be controlled by several market controllers or what we usually know as Market Makers.
The Anatomy of Candlestick
Candlesticks represent price values that occur within a timeframe, the information reflected in a Candlestick is Opening Price, Highest Price, Lowest Price, and Closing Price (OHLC Prices).
The Bull condition occurs when the Closing Price is greater than the Opening Price, and vice versa, the Bear condition occurs when the Closing Price is less than the Opening Price.
The Basic Of Price Movements (Open to Open Concept)
The Open to Open concept in the analysis of price movements believes that price movement bias is determined by the position of the current Opening Price in a timeframe (T0) compared to the previous Opening Price (T-1). This is based on the belief that the Equilibrium Price of a timeframe is at its Opening Price.
The Conditions
In normal conditions, the price will go up if Open Now > Open Before. This is because if Open Now > Open Before, we can assume that the price will make the new high or we can call the High Now price will also be > from High Before (Higher High), and Low Now also > from Low Before (Higher Low).
This trend will continue until a point where the Open Price is lower than the previous Open Price (Reversal Down).
Vice versa, the price will go down if Open Now < Open Before. This is because if Open Now < Open Before then the High Now price will also be < from High Before (Lower High), and Low Now also < from Low Before (Lower Low).
This trend will continue until a point where the Open Price is higher than the previous Open Price (Reversal Up).
The Path of Price
As we know before, there are only 2 directions of price, whether the price will go up, or whether the price will go down. In each price journey, from the Open Price to the Close Price, the price will create its Highest Price as well as the Lowest Price in a given timeframe.
When the price is in an uptrend, before going up, the price will look for the lowest price first, after that the price will chase the highest price.
This applies also vice versa, when the price is in a downtrend, before going down, the price will look for the Highest Price first, after that the price will chase the Lowest Price.
Finally, when the price on a timeframe has reached its Highest Price or Lowest Price, then towards the end of the timeframe period, the price will come back close to its Opening Price (this is why the Opening Price is called the Equilibrium Price).
The Connection Between Timeframes
After we understand how price moves, the next question is how do we know or analyze the execution time of each timeframe, when or how long does a timeframe work for its Highest Price, or when does it work for its Lowest Price?
Using the simple concept of price balance, we can divide a timeframe into 2 equal periods, the early 1st half period, and the late 2nd half period.
This period division can be used for any timeframe, from large timeframes to small timeframes. But we need to remember that the smaller the timeframe, the more volatile the movement will be.
The Timeframe Hierarchy
Price movements occur sequentially and continuously between timeframes, starting from the smallest timeframe that forms a larger timeframe above it.
When we analyze the period division of a timeframe, we must choose what large timeframe we refer to as our point of view. After that, we can lower 1 level/2 level below our reference timeframe as the timeframe that we observe.
For example, let’s see the picture below.
And so on…
By knowing the division of the period, we can analyze how far the journey of a price toward the progress of its high and its low, as well as its timing.
The Case Study
BBCA.JK
When we look at the naked chart, of course at first glance there will be no pattern or price behavior that is formed. Because, many of us have not seen timeframes that are not commonly displayed on some data providers, for example here I use Yahoo Finance.
Let’s take a look at the chart below which I have shaded in a 4-yearly timeframe, where each 4-yearly timeframe contained four 1-yearly timeframes inside them.
What we can see from the chart above is that each 4-year timeframe creates an Open Now which is higher than the Open Before, and the 1-year timeframe in it continuously and sequentially forms the High and Low of the 4-year timeframe. Then finally, at the end of each 4 years, the price returns approaching its 4-year Open price.
For current price movements, BBCA is still in its 3rd year (May 2022 — May 2023) and still trying to find its Highest Price in this current 4-yearly period. In the next 4th year (May 2023 — May 2024), we can anticipate a price decline in the process of the price approaching its 4-yearly opening price (4-yearly equilibrium price).
The Homework
We can analyze other stocks, here are 2 examples for other stocks that we can try to analyze the direction of their movement.
MNCN.JK
ITMG.JK
Any opinions? Let’s give it a shot!
Conclusions
There are many ways and points of view that we can do to look for patterns in the market and study the behavior of the price of a stock in the stock market. But I still believe that everything that happens in the market continues to run on the principles of market balance. Whatever form of transaction instrument is used, as long as it has a clear underlying and the transaction is carried out organically, of course, the principles of supply and demand are still applied.
There are several differences between the forex market and the stock market. One of the things that tickled my mind is related to determining the start of a timeframe, precisely in terms of choosing what month or year we can determine for the start of a timeframe.
In forex analysis, the start time of each 1-year timeframe is still following the Gregorian calendar, which is January 1st. At first, I applied the same thing in analyzing stock timeframes, but then I thought that the IPO time of a stock is different from others, of course, the IPO time of a stock is a starting point where the stock is initially traded.
For example, BBCA.JK was first listed on the stock exchange on May 31, 2000. Because of this, May became the first month of its 1-yearly timeframe.
If you have other opinions, please feel free to contact me. I look forward to constructive discussions.
Cheers!
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(Custom Pine Script TradingView indicators I made: https://linktr.ee/coptahpivot )
(Another article about one of my TradingView indicators: https://bit.ly/3HB7q85)
P.S. Remember, finance can be a complex world. Always do your own research and consider seeking advice from professionals before making any investment decisions.
