Why you should always look at 3 times frames and charts when trading

Traders and investors tend to look at a lot of different trading time frames and charts. Some will use intraday charts (hourly, 4 hour, 30 minutes, etc), most will use daily charts, some will use weekly charts, and a few will use monthly charts.
Different charts tell you different things. Longer term charts like weekly charts will give you a longer term outlook on the markets, while intraday charts will give you a shorter term look at the markets.

Problems that traders and investors have with charts

Traders and investors tend to make 2 mistakes when looking at charts.
The first problem is that traders tend to look at many different times frames without making a clear distinction between them. They get confused with the time frame on these charts and mix up the signals.
For example, a day trader might short the market because the weekly bar chart is sending a bearish sign. This makes no sense. Bearish signs on weekly bar charts are LONG TERM bearish signals. They tell you nothing about the market’s short term or intraday direction.
The second problem is that some traders and investors will only look at 1 level of charts. For example, medium term traders will sometimes only look at the daily bar chart.
This is incorrect. Traders should always look at charts for 1 level above their time frame and 1 level below their time frame.
Hence, traders and investors should do 2 things:

  1. Always make a clear distinction as to what the chart is saying. Long term charts (weekly and monthly) are used for long term bullish/bearish signals. Medium term charts (daily charts) are used for medium term bullish/bearish signals. Intraday charts are used for short term bullish/bearish signals. Don’t forget this.
  2. Always look at 3 time frames. Your time frame, the time frame above you, and the time frame below you

Always look at 3 time frames and levels of charts

This is a concept that I learned from my earliest days in trading.
Let’s assume that your time frame is medium term trading. You should always:

  1. Look at the long term charts (1 time frame above you).
  2. Look at the medium term charts (your trading time frame).
  3. Look at the short term charts (1 time frame below you).

Here’s why.
You need to look at the time frame above your time frame because the long term trend is important. You don’t want to trade against the long term trend.

  1. The market has a bullish bias during a bull market. Hence it is much easier to make money from rallies than from corrections during a bull market.
  2. The market has a bearish bias during a bear market. Hence it is much easier to make money from downtrends than uptrends during a bear market.

You will get a sense as to whether this is a bull market or a bear market by looking at the time frame above you (i.e. long term),
It’s self-evident why you need to look at your own trading time frame (e.g. medium term). That’s the time frame you’re trading.
You also need to look at the time frame below yours. The time frame below yours will give you more accurate trading signals.

  1. Let’s assume that you are a medium term trader. You are bullish right now. Short term indicators and charts will help you pick a better entry and exit price for your position.
  2. Big market movements will have short term signs in advance. For example, the gold:silver ratio is a short term indicator that can have medium term implications. If the market is falling but the gold:silver ratio refuses to rise, then that is a medium term bullish sign for precious metals.

Don’t use too high of a trading time frame

Some traders use a time frame that is completely irrelevant to their portfolio. I’ve seen day traders use monthly bar charts, and it completely baffles me as to why they do that.

  1. Monthly bar charts (extremely long term time frame) are almost completely useless. The high, low, and close in a monthly bar don’t capture enough detail. A lot can happen in a month (as we’ve seen in February 2018 for the stock market). Those changes barely show up as a blip on the monthly bar chart.
  2. The extremely long term outlook on a monthly bar chart has almost ZERO impact on the market’s intraday direction. Day traders trade the intraday.

Monthly bar charts are only useful if you’re Warren Buffett (i.e. invest for 10-20 years).

2 comments add yours

  1. I agree with your rationale completely in this post.in market wizards ed seykota says that the most important things when looking for trades for him are the long term chart, current chart pattern and picking a good place to buy or sell.couldn’t this be interpreted as for example you trading off the daily chart, looking at the weekly and if the daily and weekly are in confluence to then enter the trade? So in essence then looking at 2 screens and not 3?

Leave a Reply to Marco Cancel