Monday, December 20, 2010

Importance of using multiple time frames

I remember having written before on the importance of using multiple time frames for trading, even if one is a short term trader. I completed a trade today which I think illustrates this principle rather well, so I thought I would share it with you readers. BKRS showed up in my intraday scan on Friday as it was a stock which was up on high relative volume. I got in based on the 1 min chart which is shown below. I had posted about this stock even on twitter before getting in.

As you can see above, it was consolidating rather well after a decent move up. On the daily chart, I saw that 9.07 was a significant resistance level. Watching the bid and ask on the tape, I got in at 9.07 anticipating a breakout. The stock did manage to break the resistance level and closed at 9.24.

As shown in the chart below, the stock did gap up this morning, and I got out at 9.45.

Why did I sell a stock that was acting rather strong? No, I wasn't trying to catch the top. The answer lies in the weekly chart which is shown below (as of Friday). Before getting in the stock, I had noticed that the stock had got rejected at or near the MA(200) at least twice in the recent past. So, that was my price target.

So, I got in seeing the daily chart, based my entry based on the 1 min chart and sold based on the weekly chart. All this for a stock that I held only for one day. I think the above example illustrates pretty well the importance of using multiple time frames while trading. I admit that I didn't use to follow this method of looking at various time levels earlier and it is something I have picked up only this year. In the beginning, I had to force myself to look at various time frames but now it has pretty much become a habit.

Not that it matter, but the stock got rejected at the MA(200) again today and is currently trading at 9.09.

Take care and good luck!


Bill said...

Smart to take profits, plus BRKS price is benefiting mostly in the last two days b/c of an analyst upgrade (fri), so it may not have the momentum to push through the ceiling right now but the MACD is still rising long term so i say if the stock doesn't close below 8.80 in the next 2 weeks it will probably break 10.50 in the couple months but for your style this is probably not as appealing as closing in the 9.40's today.

positiontrader said...

I wish I had the patience to hold that long Bill! But as you rightly said, that's neither me nor my style of trading. Moreover, I think this market is also suited more to the hit and run style of trading.

Bill said...

i would have to agree with you on that point at the moment.

Anonymous said...

Great stuff. I do use multiple timeframes. I try to stack all the odds against me. But, I usually look at the weekly and daily most of all. I LOVE how you also incorporated the intraday for the entry - i need to work on that. I see what you are saying about the consolidation on intraday right before b/out. Excellent excellent post. Thanks for going thru the trouble of explaining!