Most investors and traders focus only on the period of time that they are trading. Tamen, the most appropriate way to approach the markets is to consider different time frames. If you look at the pattern of the higher degrees, you will know the context of the movements that you observe in the smaller time frames. For example, if you are trading on the daily chart, you will be making your decisions on the daily chart. But it helps to know what the weekly chart is telling you. If you are day-trading and making your decisions on the 10 minute chart, before making each decision, it is always worth looking at the 60 minute chart. Otherwise, you are still under the hype of the current movement that you are watching now.
The rules vary from trader to trader, however, it is important to work with settings that you are most comfortable with and that reflect your trading style. As an indication, to have a sufficiently broad reading of the market, you must observe three periods; Long, medium and short term. The middle term should reflect the chart you want to trade, once you have decided on this you can set up your other terms. As a guide, the longest time should be 4 times the average period and the shortest time should be ¼ of the average time. So, for example, if you were trading 120 minute charts, your three time intervals would be 480 minutes, 120 minutes, and 30 minutes.
The goal of working with different time periods is to start with the big picture and move to more granular frequencies. The longer period will give you an indication of the general trend. All traders must have heard the saying “Trend is your friend”, by looking at the biggest trend and following your direction with your trades, you will stack the odds in your favor. This doesn’t mean that you can’t trade against the main trend, but often in such cases you will be even more careful and conservative with your profit targets.
Whether it is your instrument for choosing stocks, bonds, currencies or futures, can be a stimulating experience. It is definitely not a hobby for people with heart problems.
The reason it’s so exciting is that you get immediate satisfaction (or disappointment). There is no way to pick a stock based on current and expected fundamentals and then wait 6 months to a year to see if you are right.
No. You see a model or hear a news story and come and go in minutes, if not seconds.
Day trading is therefore certainly exciting, but also very, very risky. Large sums can be won or lost during an average trading day.
Is there a way to minimize this risk? Reduce the number of our bad deals and increase the good ones?
- A short story
Have you heard the story of the family who went camping in the forest and got lost? They remained lost for days, wandering around looking for a road, any road, or any sign of civilization, but found nothing. Just as all hope seemed lost and they were dying of thirst and weakened from not eating, a girl appeared holding a handful of wildflowers.
“Where are you from?” Asked the husband. She pointed then turned and walked back in that direction.
The family followed her up a small elevation and, lo and behold, she arrived at a gas station on the side of a small country road. The family was saved.
It’s all in your perspective
OK, so what does all of this have to do with day trading? Well, many amateur traders operate in a single period of time. Are they overly concerned about which time period works best for their charts – 1 minute? 3 minutes? 5 minutes?
This is the wrong approach. Because? Because the perspective is lacking.
Trying to do daytime trading in just a period of time is like trying to drive 100mph looking only at the part of the road a few feet in front of your car.
- A better approach
When negotiating, always be aware of what is happening in at least two, and preferably three, periods of time. For example, if you like to trade on the 1 minute chart, open a 3 and 5 minute chart at the same time and stay on top of long term trend developments.
Only trade in the same direction as the long term trend. It will save you many trouble and also give you some unexpected profit when your trade follows the trend in a shorter period of time.
Look for cycles that are reaching the low of your Stochastic or MACD indicators in your trading period (1 minute chart in the example above) and that are about to resume the long term trend. So get on board and get on.
Then we work on the average duration; this will allow you to see more details of the general trend. This period is your primary trading chart, so you should look for confirmation of technical indicators before entering into a trade. You will also follow this after placing your trade to look for suitable exit points.
Finally, we went back down to find the most suitable entry position, observing the short period. While this chart has more noise and volatility, it also provides a clearer picture of small fluctuations, so you should be able to aim for a good entry position for your trade.
This method of analysis is not a magic bullet and traders should still take technical studies and fundamental analysis into account when setting up a potential trade. Often times the fundamentals of successful trading are overlooked by traders, but by including this top-down analysis in your trading plan, the chances of success are greatly increased.