The Bigger Time Frame Is Key
|This article written by Nick Santiago was originally published in the august 2014 issue of Traders' Magazine.
- Nicholas Santiago started trading in 1991 and later became a licensed Series 7 and 63 registered representative. He successfully managed money for a large private client group. Nick is an expert in Technical Analysis, accomplished in the studies of Elliot Wave, Gann Theory, Dow Theory and Cycle Theory. Today, Nick is Chief Market Strategist at www.InTheMoneyStocks.com
How to Recognise Trading Chances
How often have you traded a specific chart pattern which has consistently made you money? Most successful traders who utilise technical analysis will search for the same type of chart patterns that worked before when looking for a trade. After all, chart patterns occur and repeat due to the psychology of the people who are trading from them. In other words, when a certain pattern forms on a chart, it is the human emotion of the traders being displayed and unfolded right in front of you.
There are many popular technical patterns on the charts that traders follow. Some well known and traditional patterns that many traders follow are called flags, consolidation patterns, head and shoulders, cup and handles, wedges, double tops, double bottoms, triangles, and more. Most technical traders will seek these type of patterns out everyday, in the hope of the pattern repeating and producing the results it is known for.
What’s Your Time Frame?
These same patterns can be found on all different charting time frames. When it comes to charting, the manner in which you are involved in the markets will determine which time frame you should use. For instance, if you are a day trader or scalp trader who is looking for quick gains during the same trading day, then the intraday chart will be the most beneficial to you. Some popular intra-day time frames include the 5-, 10-, 15-, 30- and 60-minute charts. Scalp traders can even be found utilising a 1-minute chart, while others may trade off of the extremely fast action of a tick chart.
Then there is the swing trader who is looking to buy or short a stock and hold the position for multiple days or weeks. The swing trader will predominantly trade off of the larger time from on the charts, such as the daily and weekly periods. Next, you have the position trader. This individual is looking to stay in a stock for weeks to months, with the intention of riding the position for a much larger move. Finally, you have the investors. Investors will generally look to hold stocks for years, but rarely do they use charts to do so.
Regardless of the type of trader you are, the same patterns can be found on all of the different time frames. With time frames and chart patterns in consideration, have you ever wondered why a particular chart setup which has worked before fails and costs you money? Most do not understand why chart patterns fail. They will usually say things like, the pattern just didn’t work out this time around, they will blame the news or some rare event for the failure of the pattern. Wouldn’t it be great to know if a pattern is going to fail before it happened? Well, there is one way to dramatically increase your odds of success.
Place the Odds in Your Favour
When a chart pattern appears, the successful trader and investor understands how to place the odds in their favour. Considering the odds of a trade, and keeping them in your favour is essentially the smart traders tool for seeing the future.
Very often during the trading session, many day traders will look at a 10-minute chart pattern, which to them, looks ripe for a great trade. However, while the chart looks good on the 10-minute chart, the trade may not have probability on its side. About 90 per cent of the time this is the case, indeed. On the other hand, when you can be correct anywhere near 90 per cent of the time, in trading and investing you will do very well.
With that said, the obvious question presents itself; how do you know when a chart pattern is going to work out or fail with a very high percentage rate of accuracy?
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