Is Time Frame Analysis The Best Technical Analysis Method
What is the best technical analysis method Roger? This is the question people ask me the most when they first meet me. Just Last week I conducted a private coaching for a group of short term traders. It was a great time and I got a chance to meet some wonderful people and made some great contacts as well.
What I love the most about doing one on one coaching is I get a chance to see common patterns or behavior that many traders go through. What struck me the most from observing this group was the fact that they were not beginners; they had some trading experience and knew what they were doing for the most part.
The problem I noticed almost immediately was lack of time frame analysis, the analysis of the big picture before entering trades. The group was so focused in on the short term time frame that they completely ignored doing any type of long term analysis prior to making final decisions to enter orders.
It was actually very interesting, because this group knew their set ups, their chart patterns and the basics of how markets work. But with all their collective knowledge; they forgot the most basic principle in technical analysis. Something so basic, it’s the first thing most people learn when they begin trading.
One of the first and best technical analysis rules traders must follow is to take trades in the direction of the major trend. One of the first things I do when I begin my analysis is to look at the big picture or the long term view of the market before making any decisions. I start off with the weekly chart to see the general market direction. This should be the first thing you do after the closing bell and before the opening bell. Quite often traders get caught up in short term analysis and forget to look at the big picture, always remember to look at the forest before you look at the trees.
Take a look at this graph of the Dow Jones ETF; it tracks the movement of the Dow Jones Average. Traders can buy the Dow Jones like any other stock by using ETF’s such as this one.
The stock had a double top pattern a very reliable reversal pattern. From looking at this chart, the stock looks like it’s having a great sell off. Remember, this is the short term view. Take a look at the big picture before making entry and exit decisions.
As you can clearly see the Dow Jones is in the middle of a very bullish long term uptrend. If you are a short term trader, find another Stock or ETF to sell. Avoid selling stocks or other financial markets when the long term trend is bullish.
In this example Google stock is in a strong downtrend and gaps down. Most traders would think this is a great selling opportunity. Remember you have to look at the big picture before making specific buy or sell decisions.
The same stock doesn’t look like such a great shorting opportunity anymore does it? Why do traders insist on trading against the main trend I still can’t figure out. There are thousands of stocks to pick from but traders love to take positions against the major trend.
You can see how Apple is demonstrating the perfect Tail Gap Strategy. The Tail Strategy is one of the best technical analysis strategies, but you have to make sure and follow the main trend. Going against the main trend is one rule professional traders never break.
This is the same stock but with a longer time frame. I would avoid taking this position no matter how good the set up looked. I always look at the big picture when I start my analysis.
There are specific steps you should go through when analyzing technical charts. The first step is to look at the weekly chart.
A quick visual analysis will confirm the direction of the trend. If you can’t tell the major direction the market is moving from looking at the weekly chart, the market is probably either too choppy or flat and should be avoided. The next step is to focus on the daily chart and make sure that the trend is headed the same way as the weekly chart.
Then only take trades in the direction of the weekly chart and the daily chart. This will increase your odds of staying in profitable trades long and decrease your odds of triggering your stop loss order. It’s a win win situation for everyone.
For more on this topic please go to: Short Term Trading Indicators – Bollinger Bands As Trend Filter and Technical Trading Strategies – The Tail Gap Strategy Revisited
Till Next Time
Have A Great Weekend,
By Roger Scott