Stock Question and Answer
I’ve seen a lot of traders using different time frames with their charts. Some use weekly charts, others use daily charts, and some use intraday charts (five-minute charts, 30-minute charts, etc.). What is the purpose of using different time frames and which one is best for me?
Let’s first tackle the question of why traders use different time frames. When we look at the aggregate of stock market participants, we see investors, position traders, swing traders, day traders, and scalpers. Each one of these traders bases their decisions off of different time frames, primarily because the duration of their trades will be different. For example, investors, having a long-term horizon, may focus primarily on weekly or monthly charts. On the other hand, day traders may focus on hourly and minute charts. Larger time frames simply display the price of smaller time frames in a more compressed manner. For example, one candle on a monthly chart represents four weekly candles; one candle on a weekly chart represents five daily candles.
Although most traders typically use one time frame, a few use multiple time frames to provide additional insights into the development of price patterns which enables them to gauge the sentiment of different groups of traders simultaneously. The best price patterns are confirmed in multiple time frames. Each style of trading should implement three different time frames: main, longer-term, and shorter-term. For swing trading, the main time frame would be a daily chart, the longer-term time frame would be weekly, and the shorter-term time frame would be an hourly or minute chart.
Here are a few tips for properly using multiple time frames:
1. Don’t trade against the trend in the longer-term chart. If the weekly chart is in a downtrend and close to resistance, buying a bullish retracement on the daily chart would have lower odds of being successful.
2. The smaller-term chart could be used to:
a. Improve the entry threshold. If the main time frame shows a bullish retracement setup, drop down to the hourly chart to find a proper bullish pattern confirming the start of the bounce suggested by the daily chart.
b. Manage the swing trade. The hourly chart will show weakness or strength quicker than the daily chart, providing quicker signals for exiting the trade.
The second part of your question asked which time frame is best for you. The answer: it depends on what style of trading you focus on. As mentioned above, if you primarily swing trade, then the daily chart is probably your main time frame, the weekly serving as the larger time frame and the hourly as the smaller time frame. If you are day trading, then perhaps the five-minute chart should serve as your main time frame, with the 30-minute chart being the larger time frame, and the two-minute chart acting as the smaller time frame. It really comes down to personal preference.