I’ve noticed from the emails Trading Advice has been receiving recently that its at times like this, when the market changes its trend, that new and struggling traders run into the most difficulty, because they don’t have effective methods for holding the overview. Everyone gets comfortable as the bandwagon moves consistently in one direction, only to be thrown from their seats because they weren’t expecting the change in direction.
So here’s some trading advice about one of the most crucial skills of the successful trader – understanding how to read multiple time frames.
It doesn’t matter if you are a short-term, swing or position trader. It doesn’t matter what method you use – trend trading, reversals, whatever — you have to understand the effect of the time frames that influence your own trading period so that you can keep an eye out for impending trend changes. Failure to do this can quickly eat up trading profits as you try to enter positions without knowing which side of the trend you are on.
My own preferred method of doing this, as a short term trader of the Dow and S&P futures, is to analyze the cycles operating in the 13, 30 & 60 minute time frames. I appreciate that this may be a little complicated for some so another simple and effective method is to use multiple moving averages. Thanks to Trader Mike for highlighting this method, developed by Daryl Guppy, in his article Another Look at Multiple Moving Averages.
Linked from Mike’s article is an article by Daryl Guppy in which he explains the method in more detail. The gist of it is that the two sets of moving averages show the behaviour of two groups active in the markets – traders operating in the short term, and investors operating in the longer term. The very simple parterns of the two sets of averages indicate and then confirm trend change.
As a stock trader, or equity futures trader, if you watch the MMA’s on the 13, 30 & 60 minute time frames of the S&P500 futures, or your other favorite leading indicator, you’ll have a good sense of what’s coming down the line in terms of significant trend change.
First you’ll see the trend change in the 13, then if its real it will be confirmed by the 30 and then the 60. As you continue to watch the higher time frames 120, 180, 240 minute etc you’ll be able to see the trend being confirmed or at some point rejected. And of course you’ll see this rejection coming by going back to the smaller time frames 13, 30 etc.
As you can see the whole process is cyclical. You identify an emerging trend change in the lower time frames, you watch it confirming or being rejected in each of the higher time frames, and at some point the whole process begins again in the lower time frames.
This is one way to help you keep the overview. And by combining it with key support and resistance numbers you’ll have an even better sense of what is going down (or up!) around you.
Have a safe week,