My previous article, “Relative Strength: What it is and How to Apply to Financial Markets,” was written to identify momentum techniques that compare particular financial instruments to that of the overall corresponding market. Please relate back to that article if needed.
Now that one has identified which stock(s) are showing signs of relative strength and/or weakness, which is the “easier” part, it really is irrelevant unless your execution and entry/exit points are more precise. It is easy to identify stock which big percentage gains or losses but your entry points and TIMING are obviously more crucial.
I will break down time frames into two sections: Execution and Analytical. Both topics are used together at times, depending on your trading style, and will be used more at some times than others. Shorter-term trades, or day traders, will use the execution times frames more frequently to find their entry points. The longer-term trader, such as investors or swing traders, will predominately use the longer or analytical time frames while researching their setups.
Active traders, myself included as well as my peers, mostly use 1-2 minute, 5 minutes, or 10 minute daily charts for the majority of their trading.
– The 1-2 minute charts are the fastest moving and are used when the market is not producing clear signals on the longer time frame charts. I like to compare this shortest time frame as looking “inside” the stock and I use it when trading larger priced stocks that tend to move more rapidly or have extreme short-term moves.
– The 5-minute chart is what I use the most, and after years of experience teaching and knowing thousands of traders (literally) the 5-minute chart is the widely most used by active traders. The trends and patterns most frequently used here are active but are looked at to prevent over-trading. In order to be successful as a day trader, one MUST learn to master this time frame.
– The 10-minute time frame is used for trend analysis, support, and resistance, and the basic fundamentals of trading are more readily applied here. I use this to mostly gauge how a stock is acting in the bigger picture. Then when I identify a setup, I almost always then reverberate back to a 5-minute chart to find my entry point. This is the core time frame and I like to compare this, it’s like looking at an x-ray to get the best prognosis.
I have found that these three-time frames are the best, most common, and most effective when working on your execution.
ANALYTICAL TIME FRAMES
There were many, many times in my career, more than I should admit when I traded stocks and had NO CLUE what they did or why they acted the way they acted. If the stock had volume, range, and good price action, I didn’t care to take the time to look what they did (I did look to see what sector they were in though) but as I got more seasoned and wanted to know WHY I made money and started to go over my trades, good and bad, that I started to analyze the charts and put them into four analytical time frames.
And I am not alone in this…
-The 55-minute chart is the shortest analytical time frame and actually is infrequently used by active trading BUT is used by the longer-term trader when it comes to finding “pivots” or “inflection” points. Heavy intraday volume and sudden reversals are exemplified in this area.
-The Daily Chart is key in determining stock trends. Upward and downward biases are clearer and certain price patterns that form on the daily chart have a higher probability of following through the next day and over the course of the next several days.
-The Weekly Chart is the time frame used for the longer term trader and even more so the swing trader in order to understand the bigger picture. Markets can change on a moment’s notice so the weekly chart gives us the more accurate bias in order to stay with the longer term trend without getting stopped out on small daily movements or corrections that ALL stocks have over the course of the identifiable trend.
-The Monthly Chart is used in the same fashion as the weekly chart but the obvious is one looking at the overall picture. The habit of traders here is that once the monthly chart is comfortably identified, then I drop down to weekly and so on. Active traders like myself rarely use this chart.
This article explains the fundamentals – the CORE basics. Athletes at the top of their game practice fundamentals for 30 hours a week and sometimes, depending on the sport, apply those fundamentals for a total of 40 minutes during that same week. Truth be told, the above topic is so much more absorbable and tons more relatable when seen “live” which in time I will demonstrate by webcasts and eventually live cam.
If you have heard this before or know it already, that’s fine. I know simply by writing this and at this stage of my career I do know it already but never hurts to hear it from another perspective.