One Picture Doesn't Tell The Whole Story


21 ratings



Gabe Velazquez

09 Mar, 2009

One of the challenges a new trader faces - amongst many others - is finding the optimal time interval for the candlesticks being plotted on their charts. The trading approach or style one implements will of course, have a big influence. For instance, a swing trader (one who intends on holding positions for days and weeks) will have little use for, let's say, a 144-tick chart. On the other hand, a day trader may find tick charts an essential part of his analysis.

The most commonly used time frames are 1, 3, and 5-minute candles. When deciding which period to utilize, one must keep in mind that the shorter the time frame, the noisier the chart. In other words, the shorter time frames generate many more signals; however, those signals have a higher propensity to fail.

Traders that use ultra short-term charts (1 minute or less) are usually what we refer to in the industry as scalpers. These traders are in and out of the market in rapid-fire succession, typically taking 3 to 5 tick profits; they compensate for the high commission costs and the smaller profits by having a high win-to-loss ratio (usually over 80%). This type of trading is not something I recommend for the new trader, however. This is partly because this approach requires a high degree of skill, which can only be acquired through vast experience. This is not to say, that eventually, for those whose personalities are suited to this type of trading, and for the ones that develop the appropriate skill set, scalping may indeed become their bailiwick.

For those of us that look for bigger moves - on an intraday basis - observing several time frames simultaneously can be helpful in assisting to minimize risk and maximize our profit potential.

To this end, let's look at a recent example in the E-Mini Russell 2K (TF). Below is the hourly chart of the aforementioned TF. Note that the slope of the 50-period moving average is down, hence denoting a downward trend for this particular period. In addition, note the area highlighted in green. This is the distance between the first and second major resistance areas (the significance of this will become more apparent, as we progress through the trading example).

If we then drill down into the shorter time frame (15 and 5 minutes), we are able to spot a low risk entry within the confines of this bigger trend.

First, the fifteen-minute chart below helps us better define the break above the major resistance.

Secondly, the five-minute chart (shown below) gives us our trigger.

You need to be logged in to post comments or rate this article.

This article doesn't have any comments yet.