In order to consistently make money in the markets, traders need to learn how to identify an underlying trend
and trade around it accordingly. Common seance include: "trade with
the trend", "don't fight the tape" and "the trend is your friend".
Trends can be classified as primary, intermediate and short term.
However, markets exist in several time frames simultaneously. As such,
there can be conflicting trends within a particular stock depending on
the time frame being considered. It is not out of the ordinary for a
stock to be in a primary uptrend while being mired in intermediate and short-term downtrends.
Typically, beginning or novice traders lock in on a specific time
frame, ignoring the more powerful primary trend. Alternately, traders
may be trading the primary trend but underestimating the importance of
refining their entries in an ideal short-term time frame.
Let's start with lowest time frame charts.
1. Intraday Chart
This chart is used to plot price movements during a trading session. It would consist of all the data points between a market opening and closing.
Intraday charts give you a detailed picture for the day's movement. These charts can be used to view a single day's movement from session opening to closing or many days intraday movement from opening to closing.
For example, I may want to see the price movement on the index for an important day like the RBI Policy or may want to see the last fortnight's intraday charts leading up to the event. The most commonly used time frame on an intraday chart is 1 hour, also known as an hourly chart.
Depending on your trading style and preference you can have charts as low as tick charts which is a chart that plots price every second.
(Later in this letter I will share my secret and logic of choosing the perfect time frame for trading...)
For the time being just have a look at the chart below. It's a 60 min chart of Nifty since 17th October 2014. The data between the dotted vertical lines represents one day's trading activity.
Intraday charts give you a detailed picture for the day's movement. These charts can be used to view a single day's movement from session opening to closing or many days intraday movement from opening to closing.
For example, I may want to see the price movement on the index for an important day like the RBI Policy or may want to see the last fortnight's intraday charts leading up to the event. The most commonly used time frame on an intraday chart is 1 hour, also known as an hourly chart.
Depending on your trading style and preference you can have charts as low as tick charts which is a chart that plots price every second.
(Later in this letter I will share my secret and logic of choosing the perfect time frame for trading...)
For the time being just have a look at the chart below. It's a 60 min chart of Nifty since 17th October 2014. The data between the dotted vertical lines represents one day's trading activity.
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| Nifty Intraday Chart |
2. Daily Chart
A day represents a complete cycle of events in our lives
right from sunrise to sunset. We wake up every morning, perform our
duties during the day and retire from all the chores in the night and
the cycle moves on. We live our lives in parts and a day is the best
representation of such parts.
An advantage of looking at daily charts is that it makes your trading less emotional as it adds only one new piece of information every day. So you can sit back and take a prudent decision without worrying for tracking price change every minute. I have personally observed and learned that focusing on daily charts helps you avoid two biggest mistakes a common trader does i.e. overtrading and overanalyzing.
Most market observers including fundamental analysts, financial media etc. gauge prices on a day-to-day basis. Even the NAV of a mutual fund is calculated on a day-to-day basis. Psychologically, daily price movements is what affects the most to anyone in the financial markets.
An advantage of looking at daily charts is that it makes your trading less emotional as it adds only one new piece of information every day. So you can sit back and take a prudent decision without worrying for tracking price change every minute. I have personally observed and learned that focusing on daily charts helps you avoid two biggest mistakes a common trader does i.e. overtrading and overanalyzing.
Most market observers including fundamental analysts, financial media etc. gauge prices on a day-to-day basis. Even the NAV of a mutual fund is calculated on a day-to-day basis. Psychologically, daily price movements is what affects the most to anyone in the financial markets.
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| Nifty Daily Chart |
3. Weekly Chart
Weekly charts plot a whole week's price data. So a weekly candle opening price would be Monday's open, and close would be Friday's closing level. The highest and lowest that the stock or index may have travelled during the whole week will become the high and low for the weekly candle.
The chart that I have attached below is a weekly chart and it shows data for the same period that the daily chart posted above shows. You must have noticed that the number of candles have reduced in the weekly chart and it is also less sensitive to price movements compared to the daily chart. That's because it combines 5 days data points into 1 week. This helps focus more on the trend rather than its sensitivity.
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| Nifty Weekly Chart |
4. Monthly Chart
Monthly charts are prepared using the same principles that are used for preparation of weekly charts. The opening price of the first trading day of a month's open is considered as the opening level for month.
And the last trading day's close is considered as closing level for the month. These charts are mostly used by investors with a longer horizon. There are charts even higher than monthly time frame ones like quarterly, half-yearly and yearly but unless your investment horizon matches Warren Buffett's you don't need to look at these.
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| Nifty Monthly Chart |
Ideal Chart Time frames based on market participation
| Market Participant | Time in Position | Expected Returns in % per trade | Chart used for | |
| Trend Determination | Entry & Exit Points | |||
| Long term investor | Months to years | 30% and higher | Monthly | Weekly |
| Intermediate term trader | Weeks to months | 12%-30% | Weekly | Daily |
| Swing trader | 3-20 days | 6% - 20% | Daily | Hourly |
| Day trader | Hours | 0.5% - 2% | Hourly | 10 minute |
| Micro trader | Seconds to minutes | A few pips | 5 minute | 1 minute |
As promised, let me tell you how I go about choosing a timeframe for my analysis. The table above will help you determine an ideal time frame to choose for your analysis depending on the category of participant you fall into.
I am sure several of you will fall in the category of either a swing trader or intermediate trader. I have spent most of my career in recommending ideas to these two group of market participants, and if you are into this kind of trading, then this is the perfect platform for you!
Okay, so let's assume you are a swing trader interested in trading ideas that generate returns of anywhere between 6-20% in a period of 3-20 days.
The chart that you should pick up for your analysis or trend determination is a daily chart. All your trading decisions should be based on this chart alone. The chart you pick up for trend determination will become your 'Chart of Choice' (CoC). Now once you are convinced that the stock you have chosen is worth your hard-earned money...
'STOP'
Don't be in a hurry to place an order with your broker. Just hold on to your excitement and put your phone back where you picked it up from.
Now once you are settled just jot down your points/arguments for entering the stock.
Once you are done with it, just check one degree higher time frame chart above your 'CoC' to CONFIRM whether this chart also reinforces the same view you had about the stock when you analyzed it on your 'CoC'.
In this case we will check the weekly chart of the stock and confirm our views on a higher time frame.
If it doesn't confirm, then it's not the best of things to go ahead with this stock.
On the other hand, If you are convinced that the stock is worth your money, just hold on to your breath and check a lower degree time frame chart for best entry opportunity.
A lower degree chart in this case would be an intraday chart.
My favorite timeframe on an intraday chart is 75 minutes.
The 75 minute timeframe chart divides our market hours which start from 9.15 am to 3.30 pm (375 minutes) into exactly 5 equal-sized candles. This helps me get a better picture for the day and score over the hourly candles, which breaks unequally at the end.
In case I want to move further down on the timeframe, I choose a 25 min candle which divides 75 min into 3 equal parts or a 15 min candle which divides 75 min into 5 equal parts.
Check for a best entry opportunity on intraday charts and then finally place an order with your broker, who will be eager to buy at the market rate but you would stay firm with your price levels and not get influenced with his sweet talk.
Now I am sure you must be thinking that what do I look for on a weekly, daily or intraday chart and how do I decide whether to buy or sell a stock. Don't worry! As we move ahead in this journey I will show you techniques that help you figure out exactly how you are to decide that. But until then I have given you a process to follow while doing your analysis.
Summary:
" A trend on a longer time frame has had more time to develop,
which means that it will take a bigger market move for the security to
change course."
What time frames should you be tracking?
A general rule is that the longer the time frame, the more reliable the signals being given. As you drill down in time frames, the charts become more polluted with false moves and noise. Ideally, traders should use a longer time frame to define the primary trend of whatever they are trading. (For more on this see, Short-, Intermediate- and Long-Term Trends.)
Once the underlying trend is defined, traders can use their preferred
time frame to define the intermediate trend and a faster time frame to
define the short-term trend. Some examples of putting multiple time
frames into use would be:
- A swing trader, who focuses on daily charts for his or her decisions, could use weekly charts to define the primary trend and 60-minute charts to define the short-term trend.
- A day trader could trade off of 15-minute charts, use 60-minute charts to define the primary trend and a five-minute chart (or even a tick chart) to define the short-term trend.
- A long-term position trader could focus on weekly charts while using monthly charts to define the primary trend and daily charts to refine entries and exits.
The selection of what group of time frames to use is unique to each individual trader. Ideally, traders will choose the main time frame they are interested in, and then choose a time frame above and below it to complement
the main time frame. As such, they would be using the long-term chart
to define the trend, the intermediate-term chart to provide the trading
signal and the short-term chart to refine the entry and exit. One note
of warning, however, is to not get caught up in the noise of a
short-term chart and over analyze a trade. Short-term charts are
typically used to confirm or dispel a hypothesis from the primary chart.
