TRADING STOCKS USING MULTIPLE TIMEFRAMES; USING INDICATORS
One of the most fundamental techniques I have learned beneficial for daytrading stocks is to learn to watch an issue simultaneously in multiple timeframes. Many seasoned, successful stock traders have learned to do this. The day chart is the most important to fully understand and monitor. Before I enter a trade off of an intraday chart (or Level II action; usually it's a hybrid) I will look at the day chart (in reference to the past 3-5 days) and ask myself if I still want to enter. When trading stocks intraday (even for scalps), I watch the 30min, 5min, and 1min charts (occasionally a tick-chart, but less in the past couple of years as I've integrated Level II). The best setup is to have a screen with daychart, 30/5/1 min charts, all on the same screen. I do display volume on every timeframe and consider understanding volume in relation to price to be extremely important to stock-trading success (another topic).
On each chart, I run a 10, 20, 40, and 50-period Moving Average. As Linda Raschke says "always watch price relative to something else". The best "something else", is the MA. It represents a normalized reference point. So, when a stock is a certain % away from a given moving average, it tells you a lot. You learn more, that's repeatable that way. For example, when a stock gets out in front of it's 10-period moving average (although it may stay extended for a while), it is inevitably much more vulnerable to pullbacks. Universally - it applies on the day-chart, and intraday (intraday, for smaller pullbacks). When you're watching stocks on multiple timeframes, the higher timeframes "filter out the noise" and provide you with greater perspective, leading you to trade in the right direction, and to always be aware of the trend.
Beside the moving averages, I don't believe in most indicators (believe me, I've tried them all). If you study the math, most of them are strictly derived from the price action, so why not just watch that? Sometimes they can just unwittingly provide you an excuse for not really understanding price action - a search for the magic elixir. I do find value, for longer-term trading/investing, in some of the indicators which factor in volume, such as on-balance volume. MACD is a nice indicator for longer-term trades as well, it's just a hybrid of averaged moving averages. And some of the price indicators like Commmodity Channel Index and the Stochastics, prove more useful than price itself to some traders, in catching price reversals; but I prefer price itself. Certainly, they are very useful if you are writing automated stock-trading systems, since they are normalized making them amenable to software-generated entry and exit "signals".
I didn't fully appreciate the broad applicability of watching a security using multiple timeframes, until about five years ago studying Walter Bressert's (the master of using "cycles" to trade commodities) materials, and taking his seminars several times over a couple of years. It wasn't clear to me at first how important this is. For example, why watch a 30-min chart, when you could just crunch up a 5-min chart? That's not the right approach, to get the value out of watching multiple time frames. The trader looking to benefit from this, should always run his/her charts with the same spacing between bars (whatever you can use, and still study each bar carefully), then you'll have a "periscope" system that works across different time frames.
Good trading, -Steve |
