You are probably familiar with the expression…
“Can’t see the forest from the trees.”
If you get sooooo close to what you are looking at, you lose your sense of perspective of where you are. You lose your sense of what is important. This applies not just to life in general, but to how you look at your stock charts.
For example, is this the chart of Ford (F) in an downtrend or an uptrend?
Clearly, we have an uptrend, right? I would say so too. This is a healthy uptrend and it might make sense to get in on this trade. Also, notice that last green candlestick, A nice move on good volume!
However…maybe it isn’t a such a good trade. That was a 5 minute chart (each candlestick represents five minutes of trading activity).
Below is another snapshot of the exact same stock, Ford (F), taken at the exact same time…
Is this in a downtrend or uptrend?
Ughh…this is a huge downtrend.
Same stock. Same exact moment in time. Each chart is telling you two different things though, right?
Maybe it isn’t such a good spot to buy, wouldn’t you agree?
That downtrend chart above is a weekly chart (each candlestick represents one week of trading activity) of Ford at that exact same time.
The “uptrend” chart was a 5 minute chart.
Just because I bet you are curious what is going to happen and unfold with this particular trade I will take away the suspense and show you what ACTUALLY HAPPENED.
Here is what happened after this point with an updated chart (weekly) below:
That long-term downtrend held.
A key takeaway here is that:
There are uptrends and downtrends ACROSS ALL TIMEFRAMES.
Now that you understand that, the real key question you should ask yourself is:
What time frame should I have my chart set to?
You should be viewing your charts with a time-frame that matches your intended holding period.
- If you are a scalper – maybe you use a 1 minute chart
- A day trader – maybe you use a 5 minute chart
- A swing trader – maybe you use a daily chart
- A long term investor – maybe you use a weekly chart
You have to match your trading style, your trading method, with a charting time-frame that makes the most sense.
At this point, I would experiment, take a look at your past trades and make a note of exactly where you entered.
What happened?
- Did the trade work out or not?
- When zooming the time-frame in our out, is it apparent that what seemed like a good trade was actually a bad trade?
Tinker around and decide on what time-frame you should be setting your charts to, based upon your goals as far as your intended holding period, your profit and loss targets.
Once you’ve done that, there is one thing to know…
Always trade using three time-frames
It is all about perspective…matching your trading/investing goals with your charting time-frame.
You need to know:
- Where you are
- Where you have been
- Where you are going
If you are a long term investor, it might make sense to use a daily chart, a weekly chart and a monthly chart.
These might be the steps as a long-term investor to evaluate using the 3 time-frames:
- Use the weekly chart to perform your initial scan and review of potential trades. This should be your “default” setting in your charting tool. That weekly setting is what you would use to initially evaluate and find potential opportunities.
- When you find a stock that has potential, pull the perspective out and look at the monthly chart. If it looks like a good entry point from that perspective, make note of that!
- Next, flip back to a lower time-frame, (the daily chart) and determine whether it might be a good time to enter a position. Perhaps there will be a pullback and it might make sense to wait few days to get a better entry price. When it comes super close to pulling the trigger to enter a trade (if you care that much), maybe go to a 5 minute chart to super fine-tune your entry.
It’s amazing how things look differently when you change your perspective!
It is easy to fall into a trap of not getting extra opinions, to single mindedly focus on what you know to because it is comfortable. Changing the time-frames on your charts is like getting multiple opinions about what you should do. You might not like the answer…in that case, just move on and find a better opportunity.
Don’t close yourself off to opinions.
Keep an open mind.
Take in all of the information and make an informed decision.
I guess that holds true not just here with charting, but for how you live your life!
Happy trading!
Glenn