Timeframe Analysis

By: Chris Verhaegh

So much of today’s thinking revolves around what will happen tomorrow. People forget what happened yesterday. Where a stock has been in the past, is the best clue to where it will go in the future. Everyone should agree the future hasn’t happened yet. Needless to say, the past has taken place. But, how long ago?

Perspective produces the past. To a long-term trader intent on holding a stock for years, if not decades, yesterday may or may not have been the past. But an hour ago certainly wasn’t. To a day-trader, last week seems like a lifetime ago.

Everyone wants to buy as low as possible. Many “guess-vestors” will buy on intuition. However, you should buy on price action based on indicator setups. The price action giving you the entry will be a function of your interval. You need to match your timeframe analysis with your holding period outlook, i.e. long-term, intermediate or day trading.

A down-in-an-up to a large timeframe investor might be a substantial down to someone intending to enter and exit in a matter of hours. Don’t use monthly bars if you want to day-trade. On the same token, long-term investors shouldn’t use one-minute bars either. You need to match your intervals to your intentions. Notice the “s” on the end of intervals.

The key to timeframe analysis is using multiple timeframes. Use the largest to determine “your” general trend. “Your” trend may vary from those of others using different timeframes. Employ a smaller interval to look for pullbacks. A pullback is a falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentum. Apply a smaller interval still for the price action to give the setup for entry.

Investors may want to consider monthly, weekly and daily bars. While ultra-short-term traders might start from the bottom with one-minute bars and move up from there. Your software may limit your selection of available intervals.

Most software allows the following intervals: One-minute, five-minute, 10-minute, 15-minute, 30-minute, 60-minute, day, weekly, and monthly. Assuming yours is no different, use three consecutive choices of bars to make your analysis. With one caveat, since a trading day is 6 ½ hours long, using 60-minute bars will generate seven bars per day. Six bars of equal construction, one with half of the information going into it.

Because of the unequal dissection of a day with the use of 60-minute bars, the prevailing logic falls into two camps. First and most common answer if questioned – “Oh I never thought of that.” Second and better rationalization – “The close is the most important part of a day. So the last half hour of trading matches any other hour of the day.”

While the second answer has some merit, if your software allows you unlimited intervals selection, consider using a 78-minute bar. Since the day is 6 ½ hours or 390 minutes, it can be divided into five equal 78 minute chunks.

Like the month being cut into four to five weeks and these, generally, being cut into five days; slicing a day into five pieces allows a more consistent flow. Since five bars make the best reversal patterns, conservative investors can divide their larger bar into five pieces to see if a turn is taking place mid-bar.

Short-term traders act more aggressive and therefore might employ three-bar reversals dissecting their bars into one third chunks. Anyone wanting to day-trade should spend the money on the best analytical tools.

Wait-Less-Ness

Most traders anxiously look to place trades. Money on the sideline generates no rewards. Many traders look for faster signals. Their desire to trade overcomes their ability to make profits.

Technical analysis is the scientific art of reading charts. It helps in presupposing future price movements. If you study the mass published knowledge of technical analysis, most pundits will suggest using faster indicator settings to get quicker signals.

These quicker signals will come with more false signals. Whipsawing entry and exits cost many traders more in commission than they generate in profits. Commissions piled on by excessive trading compounds losses suffered by other traders.

While it is true, the key to finding low risk entry points is to magnify observations. This magnification shouldn’t come from faster indicators. Smaller intervals will fill charts faster. Smaller pieces will enlarge the picture. One daily bar can be thirteen 30-minute bars or even 390 one-minute bars.

Too many traders fall victim to their own devices. Their solution for a known problem becomes a greater problem still. Don’t follow them down a path you don’t want to travel.

You must combine technical analysis with pattern recognition, while functioning in the right timeframe for the intended holding period. Additionally, you should use multiple timeframes to dissect data. Become a data miner, looking through tons of debris to find the rich vein of one.