To regularly make money in the markets, traders must learn to spot an underlying trend and trade around it. The phrases “trade with the trend,” “don’t fight the tape,” and “the trend is your buddy” are all common. However, how long does a trend last? When should you enter or exit a trade? What precisely does the phrase “short-term trader” mean? In this section, we go further into trading time periods.
- A time frame is the length of time that a trend in a market may be detected and utilised by traders.
- Primary, or immediate time frames, are now actionable and of interest to day traders and high-frequency traders.
- Other time periods, on the other hand, should be on your radar since they may corroborate or reject a pattern or suggest concurrent or opposing developments.
- These time ranges might vary from minutes to hours to days to weeks to months or even years.
Trends are categorized into three types: main, intermediate, and short-term. Markets, on the other hand, exist in several temporal frames at the same time. As a result, depending on the time range used, there may be contradictory patterns within a single stock. It is not uncommon for a stock to be in a main uptrend while also experiencing intermediate and short-term downtrends.
Beginning or beginner traders often focus on a certain time period while neglecting the more strong underlying trend. Alternatively, traders may be trading the major trend while underestimating the necessity of fine-tuning their entry in an optimal short-term time frame. Continue reading to find out which time period you should monitor for the greatest trading results.
What Time Frames Should You be Tracking?
A basic rule of thumb is that the larger the time span, the more dependable the signals. The charts get increasingly cluttered with false movements and noise as you dive down in time periods. To establish the main trend of whatever they are trading, traders should ideally utilize a longer time period.
Once the underlying trend has been identified, traders may define the intermediate trend using their chosen time frame and the short-term trend using a quicker time period. Here are some instances of using several time frames:
- A swing trader who makes judgments based on daily charts may utilize weekly charts to establish the major trend and 60-minute charts to describe the short-term trend.
- A day trader may use 15-minute charts to describe the major trend, 60-minute charts to define the secondary trend, and a five-minute chart (or even a tick chart) to define the short-term trend.
- A long-term position trader may concentrate on weekly charts while utilizing monthly charts to establish the major trend and daily charts to fine-tune entry and exit points.
The choice of which time periods to employ is unique to each trader. Ideally, traders would choose the primary time frame of interest, followed by time frames above and below it to supplement the main time period. As a result, the long-term chart would be used to define the trend, the intermediate-term chart would offer the trading signal, and the short-term chart would be used to refine the entry and exit. However, one word of caution: don’t get caught up in the noise of a short-term chart and over-analyze a move. Short-term charts are often used to validate or disprove a major chart concept.
HollyFrontier Corp. (NYSE: HFC), previously Holly Corp., started surfacing on several of our stock screens in early 2007, as it reached its 52-week high and shown relative strength compared to other companies in its industry. The daily chart, as seen below, was establishing a fairly tight trading range above its 20- and 50-day simple moving averages. The Bollinger Bands® were also showing a dramatic contraction as a result of the lessened volatility, indicating the possibility of a surge on the way. Because the daily chart is the recommended time frame for detecting possible swing trades, we would need to examine the weekly chart to ascertain the major trend and confirm its agreement with our theory.
A quick peek at the weekly chart indicated that not only was HOC showing strength, but it was also on the verge of breaking new highs. Furthermore, it was indicating a likely partial retracement inside the established trading range, indicating that a breakout was imminent.
The expected goal for such a break was a delicious 20 points. HOC was added to the watch list as a possible trade after the two charts were in sync. HOC tried to break out a few days later, and after a tumultuous week and a half, HOC succeeded to seal over the whole base.
Due to the heightened volatility, HOC was a very tough trade to execute at the breakthrough point. These sorts of breakouts, on the other hand, generally provide a very safe entry on the initial downturn after the breakout. If an appropriate entry could be discovered after the breakout was verified on the weekly chart, the risk of a failure on the daily chart would be greatly decreased. Using different time periods assisted in determining the actual bottom of the retreat in early April 2007. The chart below depicts the formation of a hammer candle on the 20-day simple moving average and mid Bollinger Band® support. It also indicates HOC nearing the previous breakout point, which normally provides further support. The entry point would have been when the stock passed the peak of the hammer candle, ideally on an increase in volume.
Drilling down to a smaller time period made it easy to see that the retreat was coming to an end and that a breakthrough was likely. A 60-minute chart with a distinct decline channel is shown below. Take note of how the 20-period simple moving average was continually pulling down HOC. It is also worth noting that most indications will operate over numerous time periods. On April 4, 2007, HOC closed above the previous daily high in the first hour of trade, indicating the entrance. The following 60-minute candle clearly verified the end of the retreat, with a powerful advance on increased volume.
The trade may be tracked throughout several time periods, with greater emphasis placed on the longer trend.
The chart below shows how the HOC target was met:
The Bottom Line
Taking the effort to evaluate several time frames may considerably boost a trader’s chances of success. Reviewing longer-term charts may help traders validate their theories, but it can also alarm traders when the different time frames are out of sync. Traders may optimize their entrances and exits by adopting shorter time periods. Finally, combining several time frames helps traders to have a better understanding of the trend of what they are trading and gain confidence in their judgments.
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