Know Your Trading Time Frame

Meet Mike. Mike hates Apple (NASDAQ:AAPL). He thinks it’s going lower, so he shorts it. Now meet Jim. Jim loves Apple, and he thinks it’s a buy here…

So who’s right? Why not both?

For some reason, investors get all caught up in being “right” or “wrong” about a stock pick. Don’t fall into that trap. If you’re looking to buy or sell a stock, there’s only one thing that you should be concerned with: making money.

Yes, you read that right, there’s a difference between being right and making money. That may sound contrary to everything you’ve every heard about investing, but if you can memorize just one investing phrase in your lifetime, let it be that one.

So what does it mean?

I can think of more than a few high-profile money managers who were right about the housing market collapse in 2008 but still managed to lose piles of their clients’ money by being positioned incorrectly. Those clients didn’t care about being right about housing — they just wanted to see the number at the bottom of their account statements get bigger.

Investors who want to be right think about stocks in black and white: Apple is a buy. Apple is a sell.

But investors who want to make money think in shades of grey: Apple is a sell in the short term, but longer term, it looks like a buy.

Too many investors completely ignore time frames when they talk about stocks. So today, I want to show you how you can use multiple time frames to make more money on your next trade.

Time Frames Matter

Markets are fractal — they behave the same basic ways in all time frames. That means that the types of technical price patterns that you see on a daily chart (a chart where each candlestick represents a single day) are also going to show up on a monthly chart or a one-minute chart.

The difference is how long they’re valid for…

Whenever you look at a stock chart, you’re making a conscious or unconscious decision about your trading time frame. If you’re looking at a daily chart, you’re typically limiting your trades to days or weeks. If you zoom out to a weekly chart, you’re looking at trading setups that could materialize over weeks or months. Or if you zoom in to a one-minute chart, you’re looking at setups that will come and go within a single day’s trading session.

The important thing to remember here is that there’s no wrong answer when deciding on your trading time frame as long as it synchs up with your trading style.

If you’re watching a one-minute chart for a trade that you plan on holding for the next year, you’re wasting your time. The support and resistance levels you see intraday aren’t likely to stay significant all day, let alone all year. Likewise, if you’re a day trader, a weekly chart isn’t going to give you any buy or sell signals — there isn’t enough detail to know what’s happening intraday.

But that doesn’t mean that you should look at only a single time frame for your next trade. In fact, you can get a huge advantage by thinking about multiple time frames. Today, I’ll show you how with a real-world example.

Putting Multiple Time Frames to Work

Let’s go back to AAPL — as the world’s largest company, this stock constantly has a lot of eyes on it, but looking at multiple time frames could give you a unique view.

If you’re a swing trader, you’ll probably want to use a daily chart for AAPL first — it’s the most relevant time frame for your trading style. Here’s a technical look at what’s going on in Apple:

This chart tells us a couple of important things. First, Apple formed a pretty textbook head-and-shoulders top back in the middle of September that triggered in early October, sending shares down considerably. But shares caught support at $520 in November — and again at the start of this month.

Since $520 is a level that’s acted as strong support in the past (most recently back in May), it’s not surprising that AAPL stopped its sell-off there last week. If you’re looking to be a buyer of AAPL, that chart alone paints a pretty positive picture — after all, you want to buy stocks near support when risk is limited. With buyers piled up to put cash into AAPL at or below $520, risks are reduced now that AAPL is sitting just over that level.

But if we zoom out to a bigger time frame, we can learn more about what’s going on. Here’s a weekly chart of the stock:

The weekly adds some serious context. First, Apple has been in an impressive uptrend in the long term — and the most recent pullback last week brought shares down not just to our $520 support level, but also to trendline support. That trendline support level has acted like a floor for shares the last five times it was tested, so it’s clearly strong.

And since we want to buy near support, this most recent bounce adds an interesting bullish signal.

There is a caveat, though. It looks like Apple may be forming a long-term head-and- shoulders top with a neckline at our $520 support level (the dashed line in the weekly chart). That doesn’t contradict the bullish signal, though — if the head-and-shoulders never triggers, AAPL is still a buy. So that makes $520 a stellar place to keep a stop loss below.

After all, if AAPL drops below $520, our long-term uptrend is broken, a bearish topping pattern has triggered and we don’t want to own this stock anymore…

Until then, we do. So if we’re looking for an entry point, it makes sense to zoom in further to a five-minute chart to see when I might want to buy AAPL today:

This chart gives me a glimpse at what Apple’s doing in the very short term. For that reason, it’s most useful in planning an entry or exit — it’s a way to squeeze a little extra out of a trade.

Last Friday, Apple opened at yesterday’s highs (a resistance level) and then started trading lower. You can also see just how strong that longer-term $520 support level is — once shares touched it, they got slingshot higher. With shares coming off intraday support at $537.50, it’s a pretty decent time to buy; on a down day like last Friday, it’s worth waiting for a stock to catch a bid at support before jumping on board.

You don’t need to use three charts to figure out how to trade Apple. Obviously, you could stick with just the daily chart and reach the same conclusion — but looking at the weekly and daily charts adds some critical context to the trade. The weekly tells us that long term, we’re still in a strong uptrend and that a break of $520 would be even more negative than the daily chart suggests. The five-minute chart, on the other hand, helps us peg a better entry for the day.

When the same conclusion lines up on all of your time frames (a buy signal on each chart, that is), you can enter a trade with a whole lot more confidence than a single chart could provide. And if you see a divergence (a buy signal on the daily, but a sell signal on the weekly, for instance), you’ve got a good signal that it’ll be critical to get out at the first sign of trouble if you do decide to take the trade.

Buy and sell decisions shouldn’t be black and white – time frames are critical parts of any decision you make. And there are no two ways about it, looking at multiple time frames consistently will make you a better trader.

Have a great weekend,
Jonas Elmerraji, CMT

Know Your Trading Time Frame was originally featured in the Penny Sleuth.

This story was originally featured on Penny Sleuth.

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