A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
A Common Mistake That’s Easy to Fix
05/31/2012 2:00 pm EST
Failing to analyze trade set-ups on multiple time frames is a common and potentially costly mistake, says Sandy Jadeja, who explains how to conduct more proper analysis.
What are the best trading strategies to use right now? My guest today is Sandy Jadeja, and Sandy, that’s a broad question, but what are some of the good strategies you’re seeing right now?
I think the key is that you’ve got to find something that suits your personality. We’ve been preaching this over the years. I think really what’s important right now is momentum trading.
In other words, are we in a bullish momentum environment or a bearish momentum environment?
The key is keep an eye on the simple indicators. Everyone looks at a 20-period moving average, and it works, right? So, at the moment, a 20-period moving average is above the 50, above the 100, so what trend are we in? Bullish.
But then again, we’ve got short-term traders saying, "Well, I only want to be in the market for two or three days. What do I look at?" Breakouts.
So you can have a trend-following strategy or you can have a breakout strategy. One of the key things I like about breakouts is consolidations.
In other words, watch a price move. If a market has made a move towards the upside, and then suddenly we see a consolidation pattern or a bull flag, then watch for a breakout, because it gives you very low risk. You can buy the break of the high; put a stop at the low.
See also: How to Tell a Breakout from a Fakeout
So, the key question is, “What type of trader am I? Am I a trend follower? A momentum trader? A breakout trader?” Then, find that style to suit your personality.
How about time frames? Can I trade on, say, a five-minute chart, but then also have a trade on the daily charts?
I disagree with that, and this is why. A lot of people come to me looking at a daytrade, and say, for example, they went short and the day actually rallied. What they do is they change their mindset into a different time frame, thinking “I’m going to hold on to this because tomorrow it’s going to go up.” Don’t do that.
The best thing to do is to say, "I’m going to try the short-term time frame. This trade is going to last for four or five hours." If it doesn’t work, get out. You can always come back and play another day.
You have to use multiple time frames. One of the biggest lessons I’ve learned in the markets is to use multiple time frames. What is the monthly chart telling me? What is the weekly chart telling me? What is the daily chart doing?
We sometimes get caught into what’s happening right now. The market could be falling, for example, for two or three days, and we can get complacent and think actually we’re now turning into a bearish trend. Not really; we could be classifying this as a pullback.
If the weekly trend is up and the daily trend is down, buy into that. If the weekly trend is up and the daily trend is up, wait for a pullback in the daily trend.
The key thing to remember is that multiple time frame analysis is essential in every trader’s toolkit.
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