Picking the Right Stock Chart for the Right Range
If an institutional investor likes the monthly setup and a hedge fund likes the weekly setup, they will both be interested in a stock. Investors trading the daily and intraday time frames are also tuning in and may find some compelling short-term signals. This merging of signals across various types of investors is very helpful. You can use this to your advantage.
Look at multiple periods before placing a trade. First, look at daily, weekly, and monthly charts just to get a feel for the setup. The more investors you see looking at the same trade, the better. Sometimes the stock price is breaking through a down-sloping monthly chart. This is easily spotted on a short range. By understanding what is happening on the other period charts, you get a feel for the importance of the level.
There is a reason to discuss the principle of multiple periods depending on your trading style. Trading strategies are typically more successful in the direction of the next higher time period. If you want to trade based on a specific period chart (for example, daily), it is a good idea to use a complimentary period chart at least five periods higher for trading with the trend. As there are five days in a week, use a weekly chart to analyze the direction of the trend.
Other key multiple periods to watch include the following:
- To trade a 10-minute chart, use a 60-minute chart for confirmation. There are six periods of 10 minutes in a 60-minute chart.
- To trade from 60-minute charts, use a daily chart for perspective. There are 6.5 periods of 60-minutes each in a daily chart (9:30–10 a.m. is 0.5 hours).
- To trade daily charts, use weekly charts for the trend. There are five daily periods in a weekly chart.
- To trade weekly charts, use monthly charts. There are 4.3 weeks per month.
The most important decision you need to make when looking at charts is what time frame you can sleep comfortably with. If you need to move to cash before the market closes every night to sleep well, you’ll have to be a day trader. If you like trades that last a couple of weeks and you want to be very active in the market, you’ll need to trade on daily and 60-minute charts. If you want to keep your trades three weeks to six months, daily and weekly charts will be your best choice. If you want to execute trades a few times a year, you may rely on weekly and monthly charts.