Time Horizons and Trading Styles

By: Oliver Velez

The following is an excerpt from Oliver Velez’s Swing Trading Home Study Course

The Long Term Timeframe

The long term timeframe consist of yearly and monthly charts.  A yearly chart is a chart where every bar represents one year of trading.  The yearly chart is used primarily for cyclical analysis and sometimes for long-term trading.  On the monthly chart every bar represents one month of trading, or approximately twenty trading days.  As a swing trader you will review the monthly charts of all stocks in your universe at least once a month.  The monthly chart is an excellent chart for longer-term trading, and the swing trader may use monthly charts to help find longer-term trends. 

On these charts, the vertical dotted lines represent the years, and the scale along the bottom lets you know that every bar represents one month.

The Intermediate Timeframe

The next timeframe is the intermediate term timeframe, which consists of weekly and daily charts.  The weekly chart is the key chart used by longer-term traders and will be the source of 85% of their plays.  On the weekly chart every bar represents one week or five days worth of trading.

The Daily Timeframe

The daily chart is the home for the swing trader.  Eighty-five percent of the swing trader’s trades will originate from the daily chart.  Every night the swing trader will review his or her universe of stocks through the eyes of the daily chart.

The daily chart is the most common chart you will see if you are not an active trader.  Every bar represents one day’s worth of trading.  The bars and the overall flow of the chart are the same as a weekly chart or a monthly chart.  This is true of all charts, even intraday charts.  I personally do not consider a chart unless it is displayed in Japanese candlesticks. 

There are two moving averages on this type of chart, the simple 20-period moving average and the simple 40-period moving average.  These two moving averages are staples that should be on all of your longer-term charts.  They are used as trend-setting tools and help us determine the nature and quality of the trend of any particular stock.  Between the Japanese candlesticks and these two moving averages, we virtually have all of the tools we need for swing trading effectively.

Next, we have the short term timeframe.  This timeframe consists of hourly charts and other intraday charts such as the 15-minute and 5-minute charts.  In an hourly chart, every bar represents one hour’s worth of trading.  The vertical lines represent the breaks from one day to the next.  The different trading platforms will show slight differences because of the fact that there are six and a half hours in every trading day.  You may opt to start your hourly charts at 9:00 EST or 9:30 EST and, depending upon your choice, there will be a slight difference in the final result.  There is no uniform agreement on which is appropriate.

The hourly chart is an incredible chart.  It is versatile in that it can be used for short term hits by swing traders, and it serves as an excellent alternative in choppy environments for one to two day holds.  It is also used widely by the intraday trader to help determine the trend of the current day.

Intraday charts, namely the 5-minute and the 15-minute chart are used primarily by day traders and occasionally to refine management in longer-term trades.

Wealth and Income Building Styles

The use of these charts makes available four major styles of trading.  These four major styles of trading can be grouped into two broad categories.  They are known as the wealth building style and income producing style.

The Wealth Building Style: The wealth building style includes core trading and swing trading.  Core traders primarily use the weekly charts for holding periods ranging from a few weeks to many months.  This is the long-term style of trading and differs from investing because all traders will always be managed and never left to the “buy and hold” mentality.  Swing traders will primarily use the daily chart and look for holding times from two to five days, and occasionally out to ten days.

The Income Producing Style: The income producing style of trading includes guerrilla trades and intraday trades.  Guerilla trades refer to a specific set of hit-and-run type tactics that range from swing trading off of the hourly chart to a list of very specific trading tactics.  Intraday trading is also referred to as day trading and also includes the subset of micro trading.  All have in common the fact that traders will be exiting all positions by the end of the day.

If you’re going to be trading the markets full time it is important to understand that you need to be involved in both the wealth building and income producing styles of trading.  The reason for this is because when markets are trending up or down and experiencing very strong moves, the vast majority of money is made from longer-term positions and longer-term holds.  When markets tend to go sideways for long periods of time, it can become difficult to produce wealth from longer-term trading.  Traders who are able to produce income on shorter time periods to supplement the longer-term moves of the market will have an advantage over those who are restricted to one type of trading.