I expect the S&P 500 index to trade between the recent high and low for a while, several weeks o...
What to Do When Time Frames Conflict
11/18/2009 12:01 am EST
Just when last Thursday looked like the market would finally put in a more sizable pullback, we get a tiny surprise gap up on Friday, which then ended up trading above some resistance that was created from Thursday’s trading day, only to power up into a tradable void.
Friday ended closing bullish as an inside day and today will bring more great trading opportunities, at least on the shorter time frame charts. The type of action that we had on Friday is something I categorize as “guerilla trading.” It is a type of “hit and run” trading where I drill down to the smaller time frame charts to take out smaller gains from the market that are reliable, while having very tight stops with proper market timing and money management techniques. Once you know how to take advantage of these great styles of trading, it becomes easier and easier to pull money out of the markets routinely.
During that time, I took two reliable trades with a relatively small share size that produced a reasonable gain for the day. A total of less than 20 minutes in the market. I worked on various other details the balance of the day, but in reality, my trading day would have been over after taking just two trades in less than 30 total minutes of trading.
What about conflicting time frames?
It's a very common event that usually puzzles many traders, who are ever looking for confirmation from all possible sources. You have a great looking setup on the daily chart, but as you take a look at the weekly chart, it seems "extended." So you forgo this setup and press on, looking for the one that has confirmation in all time frames. Sometimes you will get confirmation from several time frames, but in other situations, it won't be possible. So you'll have to select the time frame you'll trade. This common dilemma haunts the trader every day.
The first thing you have to understand as a trader is that conflict among the various time frames will always exist. A setup on a daily chart might not look too appetizing on an intraday chart, or it might look "extended" on a weekly chart. So if you get conflicting observations from different time frames, what can you do about it? Stop trading altogether until everything confirms? You'll probably be waiting forever. What you can do is first understand the implications of the different time frames and their correlations.
Often times, a sloppy setup in one time frame may produce and excellent looking setup in one time frame lower or higher. As traders and investors, we must know the proper way to analyze and interact with the market in different time frames. Sometimes, you have to disregard one time frame to try to obtain the potential profits suggested by another. Some other times, one longer-term time frame will discourage you from trading a shorter one. Picture a very strong uptrend in a five-minute chart, which has moved up for the whole morning, forming eight green bars on a 15-minute chart. Then you get a great looking setup on the five-minute chart, which turns out to be a reversal bar in 15-minute chart. Get the idea?
So, select the time frames that are relevant to your trading, and look for the necessary evidence, but don't look for the perfect confirmation of every time frame, every time. You might just be left out of every trade.
By Ron Wagner
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