Proper Time Sequence Matters
With all the online brokers that are popping up these days, the availability of charting tools to everyone, including the novice investor and day trader, is a reality. Most people have no real clue how to read a chart or much less, what any of the various indicators may or may not do. One thing is certain, the market has an uncanny way of making unskilled people (and skilled alike) think they have found something that will beat the market, only to have the conditions change and what worked before loses now.
One thing most people don’t even think about is the time sequence on the chart they are looking at. Meaning is it a 1 minute chart, 5 min, 15 min, or daily? No matter what timeframe you are looking at, in order to get any sort of reference you have to consider the higher timeframes. By this I mean if you are on a 5 minute chart (not recommended, because of ubiquitous use over the years has ruined it – but this is another topic), you need to know for sure what is going on 2 timeframes higher that are still related (close to it). This does not mean pull up a monthly chart. This means what are the 15 minute and maybe the 45 minute chart looking like?
All this comes down to figuring out what the other people will look at. Just because you see something on a 5 min or 10 minute based chart that seems the stock is going higher does not mean that the other players in the stock see the same thing. Some might be using larger timeframes, some smaller. Each interprets in their own way and then buys or sells based on what they think is the most likely trend in the future. Even 2 people on the exact same timeframe can read it differently. This is why you need to consider 2 higher timeframes to try to get them to line up – meaning 15 minute looks long, as does 45 minute(or 30 or whatever other higher you like) . They do not have to be exact, but they should tell the same tale – but one thing is for sure, if a 5 minute looks long, but the 15 and 45 minute are in big downtrends, you are going to have quite a fight on your hands to hold it long UNLESS you per chance have called the exact turning point on a stock. Either way, any day trades or stock picks need to keep this in mind to have the greatest chance for success.
Using a Chart for Timing of Entry
Stock charts can give good information for timing of entries, with the intention of entering at a price where the stock should move in your direction with minimal risk. Of course this is by no means perfect, but it does give a decent amount of information about past patterns of buying and selling behavior. It only affects a local entry, a chart cannot predict what a stock will do in a year, or even a few months out – that is simply too much time and there are too many unknowns (news, market conditions etc).
One thing to keep in mind is your time horizon for holding the stock trade – if it’s an intraday or day trade, timing is super critical. If it’s a longer term hold, it’s less critical. The reason you need to know this ahead of time is the risk of missing the trade. Intraday timing is critical, if you miss the trade you usually don’t get another shot, or your shot happens when the move is done and there is no reason to go in anymore. Longer term, if you miss it today trying to time the entry, usually in a day or 2 you get another shot, primarily because the time horizon for the holding of the trade is much longer and you are shooting for a much bigger gain potential.
Here are a few rules to help with using a chart and entry timing:
1. Put a 13 period average on the chart. The timeframe is not that critical, it works on a 5 min chart as well as a 30 min and daily chart. Notice if the stock has been holding above the 13 period average, or below it. Often times this will serve as support (above) or resistance (below) and is a good area to try to enter near if the trend pattern is there.
2. Look at big moves in the stock, both up and down over the last 30-60 bars of data. Use the highs and lows and look at where the stock closes versus this point AND what it does the next bar. Does the stock fade large moves and reverse, or does it hold up and then move more? If the stock tends to fade large moves, then obviously don’t enter on a large move. Wait for the fade.
3. Find key resistance points and support points where it tends to have problems getting through (if there are any). You don’t need more than about 6 months max of data to do this, any further back is usually worthless from my experience. These are key areas to watch, especially if it gets near there and volume is dropping off, this is a key thing to watch.
4. Any trade that is shorter term in nature needs a stop price. Usually a good way to find a stop is to look at the average range (high/low) of the last 3 bars. This gives you an overall volatility, assuming you don’t pick a super quiet period of time where there is no movement. Take the highest high – the lowest low of this range, then take 60% of this number and subtract it from your entry price. This should be your max risk.
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