How to Look at Price Bar Data over Different Time Frames - dummies

How to Look at Price Bar Data over Different Time Frames

Looking at price bar data in different time frames can help you make a sound trading decision. You can zoom out to a higher time frame (such as weekly) or zoom in to a shorter time frame (hourly).

Price bars are fractal, meaning you can’t tell by looking at a chart what time frame the bars represent. You can’t tell a chart of 15-minute price bars from a chart showing daily bars. They both show the same bar components acting in the same ways. If a chart isn’t labeled, you can usually assume that the bars are daily bars.

Using daily data

Most beginners at technical analysis start with the daily price bar. Daily data is widely available and free or cheap. Daily data is the standard because

  • Most of the commentary in newspapers, magazines, and Web sites refers to daily bars. It’s the “base case.”

  • Embracing daily price bars puts you on the same page with the majority of people in the market.

  • Even people who use intraday data (such as hourly bars) also look at the daily price bars.

Technical analysis writers are sensitive to the increased use of intraday data and usually speak of periods rather than days. Changing the vocabulary has the unfortunate effect of making some technical analysis writing sound formal or pompous — but it’s more accurate.

Zooming out to a higher time frame

You can display prices in a weekly or monthly format. A week has an opening price (the first trade on Monday morning) and a closing price (the last trade on Friday afternoon), with a high and a low somewhere in between. The weekly close is a summary of the sentiment of the majority of market participants for the week, just as the daily closing price summarizes sentiment for the day.

You can often see trends and patterns over longer time frames that are hard to see on a daily chart. If you’re using charting software, make the habit of toggling the chart from a daily time frame to the weekly and monthly time frames to see whether anything pops out at you. In addition, you can use, say, a weekly chart to confirm a new trend that you discover on a daily chart.

Zooming in to a shorter time frame

Many traders today track and trade prices on shorter time intervals, like the 60-minute bar.

  • Getting the data: Live, real-time data used to be too expensive for the little guy and only big firms could afford to buy it for their professional traders. Now anyone can buy it for a few hundred dollars per year. With a 10- or 15-minute time delay, you can get intraday price bars for free on many Web sites. Most brokers give you free live data in return for your opening an account.

  • Choosing an interval: The only logical way to select an interval is to treat it like a new pair of jeans. Try them all on your favorite security and see how they look. Selecting the interval to use in displaying bars is subjective. For example, you might

    • Use an odd number of minutes (such as 13 or 73) because those bars regularly show patterns that give you insights.

    • Look at what everyone else is looking at, on the principle that following the crowd is usually the right way to forecast.

    If you’re watching a traditionally heavily traded security, you get a complete bar for every 1-minute interval, and each bar contains the open, high, low, and close of that minute. Be careful not to sabotage your analysis by selecting a time frame that’s out of sync with the normal flow of trading in the selected security.

The key to selecting the right interval is the liquidity of the security you’re trading. Liquidity refers to potential volume in this context — kind of like a bench of buyers waiting around for their chance at bat, meaning a price that pleases them, with an opposing bench of sellers willing to throw balls until somebody takes a swing. A liquid security has a lot of buyers and sellers, with some of them active at all times. Liquidity results in real trades that are measured as volume. A security with only one or two interested parties is not liquid, as you may have discovered if you ever tried to sell a thinly traded penny stock.