Importance of Utilizing Time Frames

A very important thing to look at when determining whether or not to take a setup or not is to look at it from several points of view. In the market these are called Time Frames. The ones that are the most pertinent to you will depend on your objective as a trader. For instance, let's say you are a swingtrader. Your primary focus is going to be to look for patterns on the daily charts for buying or shorting opportunities. Once you have a list of stocks that caught your eye, however, it is usually so many that you then need additional means for trimming down that list. One of the ways to do so it to look at those symbols on several other time frames.

For a swingtrader for instance, it is helpful to look at a weekly chart. This will show you where your pattern is at in the larger trend. If you have a bull flag on the daily, but on the weekly you can see that the stock is coming into very strong resistance, such as an equal move from the last weekly breakout, then the odds for success on your swingtrade are going to be lower. This is because, with the weekly so extended, you are nearing the probable end of that swing upwards on the weekly chart and more likely to start to see reversal patterns begin to form. Now let's say you still have a pretty decent list to choose from. Most of your daily charts still had room to move on the weekly as well.

What you want to look at next are the smaller intraday time frames. For a swingtrade, these will be the 15, 30 and 60 minute charts. What you want to watch for are smaller buy patterns on these time frames as well that can lead into a trigger on the daily chart. If you have a bull flag on the daily, look on a 30 minute chart for a base along the highs of the trend channel in the bull flag. As that base breaks, you can use that as your entry trigger, instead of having to wait for the daily breakout, which might not occur until the pace and volume in the market have already picked up and are moving strongly higher. If that is the case at the time of your entry, the odds of you getting in near a short term top are much higher. What this does is make it easier to mess up your trade by getting scared out of the position on a rather significant intraday pullback well past your entry point.

If you are a daytrader only, the weekly charts won't matter as much to you. Even if a stock is at weekly resistance, you can still get a nice upside move intraday. On the other hand, the smaller intraday charts like a 5 minute or even a 2 minute will matter. They will be like the 15-60 minute charts for the swingtrader. You can use these smaller charts to help time your entries.

The same can be done with exits. As a stock is coming into a target level and you want to look to get the most out of it without having to hold through any more pullbacks, you can use the patterns and action on the smaller intraday charts to help you time an exit. This is where the multiple time frames really come into play: as a way to manage and reduce risk, as well as increase your reward potential.

You want to be very careful, however, to pay attention to the time frame you took the pattern on. If you took a daily bull flag, you don't want to use a 15 minute chart halfway to your target for anything other than assistance on trailing stops. Just because you see resistance on a 15 minute chart doesn't mean that the daily rally is over with. More likely, it will just lead to a temporary correction before moving higher again. Too many traders drop down to smaller time frames and start trying to micromanage the trades when they are in play. What this will most often do is just get them out at temporary resistance levels, diminishing their risk:reward potential and keeping them from reaching their targets or objectives.