How to Use Multiple Scales in Trading
Consulting various time intervals of the same market provides you with a different perspective in a similar way that you can look at an object with your naked eye or with a microscope. The magnification you use in looking at that object allows you to see things you wouldn’t see with the naked eye.
Each time interval chart looks different and provides different signals. The following figure shows a chart demonstrating that Google’s stock on the daily chart is heading down. On this “scale” (where each bar represents one day of trading activity), the trend is down.
If you look at that same period of time for Google’s stock but magnify the chart five times and use weekly bars instead (where each bar represents a week of trading activity), you see a very different picture. The next figure reveals that the downtrend on the daily chart is merely a temporary retrace in a major uptrend on the weekly chart.
Seeing contrary trends of the same market on different time intervals can create confusion for traders. The question arises, “Which is the ‘real’ trend?” The answer is that there’s no such thing as a “real trend.” The trend is relative to the time interval. So in the case cited in the two figures, the market is in a downtrend on the daily chart but in an uptrend on the weekly chart.
You apply this relativity in trading by simply choosing which time interval chart to base your trading on. You use the trend of that time interval for your analysis of the market and your decision as to whether to trade and in what direction to trade.