Monday, July 26, 2010

Using multiple time frame charts to find out entry/exit points

As the regular readers of this blog know, I am a short term trader. And I take it, so are most of you readers who visit this blog. As short term traders, we usually use anything from 1 min to daily charts to determine our exit strategies. But sometimes, these shorter time frame charts hide the dangers that lurk ahead. Let's take the example of NR, a stock that has been doing quite well recently. I have been holding on to it for quite sometime now (a big deal for me as patience is my trading's Achilles heel!) and adding on the way up. BTW, I have been blogging about this one for a long time and even did a full post on it over a month ago, I hope some of you readers made some money off it too! But enough of me patting myself on the back. Let's get back to the subject of this post.

Here is the daily chart of NR.

Looks beautiful, doesn't it? Firstly, a very bullish volume pattern pretty much the entire past six months. Bouncing nicely off the trendline. Consolidated very well below 7 before breaking it on good volume. Finally, it made 52 week highs today, again, on better than average volume. Empty road ahead, don't you think so dear readers.

Now lets step back a bit. Now we have the weekly chart covering a period of two years.

We see that the stock last reached these heights (pun intended!) in the last few months of 2008. It got rejected at around the 9 level back then. Well, which stock didn't at that time, we might say. After all, the stock has made a beautiful U-shaped recovery since then. Point well made.

Now let's step back a bit more. Almost 9 years to be precise (almost and precise in same sentence?!). And what do we see?? Yikes!!

The stock got rejected at these levels in 2002, 2005 and 2008. Need I say more about the  importance of the upcoming resistance level?

Now, as I am sure all you readers know, prices have a history. No, there is no magic behind this statement, just the fact that, taking NR again for example, that there have been a lot of shareholders who bought at the top around the 9 mark waiting for a long time to get out of the stock at breakeven. These are the so called long term investors who just don't how to take a loss. These people will start dumping their shares as soon as the stock reaches the previous highs. Maybe the stock will manage to overcome this resistance, maybe it won't but the point is that we would have completely missed the importance of this level if we hadn't gone back almost 10 years! I hope this post helps underscore the importance of looking at multiple time frames to find out entry/exit points. Do I follow this on every stock I trade? Hell no, I am not smart enough to follow everything I say. I do it often enough, but seeing charts such as these makes me realize that I should make it a point to always look at longer time frames at least for all my swing trades. I hope you readers found this post useful too.

Take care and good luck!


Anonymous said...

Excellent post and example. If we all took the time to do this we could save ourselves a lot of stress and make some great trades.

positiontrader said...

Thanks anon! I understand that its easier said than done in the heat of the moment but a little bit of planning goes a long way. Thanks for reading!

Anonymous said...

Thanks so much for sharing your knowledge. I wish I knew anything at all like this before I bought MSFT and PFE at their highs and stuck with 25% to 32% loss even after years and months holding them. You are a very effective and generous teacher!

positiontrader said...

Thanks for the generous praise Anon! You have made my day, rather night :). I am glad if I even one person can benefit from posts like these. Makes all the effort and the time spent on this blog worth it.

BTW, don't be too hard on yourself about the loss. Losses are part of the game and actually better than profits if you keep learning from them. Think of it as tuition to the markets. Check out the introduction posts under the label for more on someone who learned all he knows from making mistakes and in fact, still makes them and learns from them. ;)