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Interestingly, if the shorter time frame (in this example, daily) continues to exhibit a continuity of thought indicative of a bull market, then I will be ready to go long when the time frame I was using (weekly) generates a buy signal according to my methodology. |
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I should stress an important point about using multiple time frames. There are advantages and disadvantages to all time frames. Monthly and weekly charts are common among large institutional traders, since this is one of the ways they can move thousands of contracts without adversely affecting their profitability. Weekly charts tend to exhibit much less volatility, and the continuity of thought tends to last longer. Traders incorporating monthly and weekly data use much larger stops than a similar methodology using a shorter time frame. Daily charts are where the bulk of the traders live and die. The level of volatility is naturally higher, and the stops are smaller, in daily charts. Traders using charts constructed from hourly, n minute, and tick charts have the tightest, smallest stops and also experience the most volatility. |
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Regardless of your time frame for trading, you can always use a larger or smaller time frame to analyze the markets. It is critical that after you decide what time frame you will trade from, you stick to that time frame. It is also critical that you take every signal that your methodology generates from your chosen time frame. Naturally there is an exception to this rule, and that is if the next longer time frame than what you are trading in, indicates a major possibility of a break in the continuity of thought. Then you might want to enter into the trade with fewer contracts or decide to pass on the deal. However, you must have predefined what the longer time frame must be doing to make you pass on what your methodology is telling you to do. |
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Here is another example. As I write, May corn is creating a sell signal according to my methodology on a daily chart. However, on the weekly corn chart my methodology indicates that in all probability the continuity of bearish thought that has created the present bear market is broken. Therefore I decide not to take the sell signal that I normally would take. Now at this point in time I have no idea if corn will continue down or if we are about to enter a bull market. What I do know is that with everything I can discern in this instant of time, there is a high probability that the continuity of bearish thought has changed. Whether the bears will build a consensus of opinion and reestablish their continuity of bearish thought remains to be seen. What I am certain of, though, is that if the bears do in fact reestablish their continuity of thought, I will get short as quickly as my methodology allows. |
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Your entry point strategy and exit point strategy are interwoven with each other and with the way you perceive the market. There is no one perfect |
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