Use Daily Technical Analysis to Trade Lower Time Frames
Posted on September 13, 2010
Since the last update we have seen more buying which is not a surprise. When the market is in a trading range, price tends to hit the upper target after bouncing off support and vice versa. This makes it easy for the trader to determine the target. Stock-Market-Strategy uses a trend-trading strategy based on market phases. We only trade either a down trend (phase 4) or an uptrend (phase 2). We never trade a market bottom (phase 1) or a market top (phase 3) as these phases are not confirmed until after the fact. For example what seems to be a phase 3 market top could turn out to be sideways consolidation before another upmove. These terms will become clearer to you when you have signed up for our membership and receive our exclusive eBook called "The Winning Formula".
We react on the market actions. This means that when we enter a phase 2 uptrend then we know for sure we are in an uptrend regardless of how brief it may be. When the market trades sideways we do not know whether it is consolidation in the current trend or a potential trend change (either phase 1 or 3). This is exactly what is happening with the market now. We have seen a phase 2 uptrend since March 2009 which we started trading in July 2009 after getting 100 % proof of a trend change. But already in February 2009 our analysis warned us of a potential trend change. So despite market making new lows in the fall of 2009 and every "guru" on CNBC calling for further selling we stayed on the sideline. We wanted to preserve our capital for the potential trend change. Furthermore we did not want to give back the profit that we made on shorting the market in 2008. Needless to say we made the right decision back then and we believe we are making the right decision now by waiting this current market out.
We have many members asking for calls, either short or long and despite seeing other newsletters losing money when making calls in this current market our members seem to still have an "itch" in the trigger finger. We learnt the hard way because the more "itchy" our trigger finger was, the more we lost in trading. We started trading with the wrong idea in our head. We thought that, because the market is open 5 days a week then there are trades 5 days a week. Just like many of our mentors, we lost a significant amount of money before realising the truth about trading.
So, now we are adapting our strategy to the current market. We will still only call trades in a trending market but we are lowering our timeframe to 60 min. which is something we will do when we feel the market can support it. This does not mean we will not look at daily charts as we are still using daily charts for analysis, position size, stock scan and so fourth. So for example, when we are looking for long plays we look for trending market on 60 min chart that is in alignment with the daily charts and scan for strong stocks in strong sectors on both time frames. Bear in mind that as it is the 60 minute chart, the duration of the trade and the targets will be smaller. Another thing to keep in mind is the timing of the entry. Because the entry is based on a 60 min chart our members will have to be more active so we recommend that our members should only trade these calls if they are experienced and active traders. Furthermore we recommend that you start with either a paper trade or a very small position.
One last comment regarding a 60 min chart is that our studies show that the lower the timeframe, the more noise and fake signals. This is means that the calls on a 60 min chart will not be as high odds as on the daily chart.
To make it easy for you and for us at Stock-Market-Strategy we will divide the calls up into to portfolios:
- Rapid Portfolio
- Endurance Portfolio.
As previously mentioned, the market is in a sideways channel making trend trading impossible. So what we do is analyse the daily SP-500 to locate support resistance to make sure that our potential trades have a decent risk/reward. We then drop down to a 60 min chart to locate phase 2 or phase 4 that originates from those above located support resistance areas. We then scan and analyse stocks on daily charts, finally dropping down to a 60 min chart to analyse the current phase and look for setups.
By looking at the daily SP-500 we can see that we are coming up to resistance on the daily chart. This means that we are not recommending any long plays here as the risk to reward is terrible. Going long just before proven resistance and hoping for price to break the resistance is purely guesswork which we strongly believe does not belong in trading.
[caption id="attachment_730" align="aligncenter" width="300"] Click on Chart[/caption]
[caption id="attachment_731" align="aligncenter" width="300"] Click to see Phase Examples[/caption]
When price comes up to resistance on the daily chart we will then drop down to 60 min chart and look for either a phase 3 topping price action with a trend change into a phase 4 downtrend or sideways consolidation before breaking the resistance.
We will be scanning for both strong and weak stocks and as we do not know what the market will do, we have to be prepared for both scenarios. Preparation is important in trading as it helps contain the emotions when entering the market.
When the market makes up its mind at the daily resistance point then we will be calling some trades.
We react on the market actions. This means that when we enter a phase 2 uptrend then we know for sure we are in an uptrend regardless of how brief it may be. When the market trades sideways we do not know whether it is consolidation in the current trend or a potential trend change (either phase 1 or 3). This is exactly what is happening with the market now. We have seen a phase 2 uptrend since March 2009 which we started trading in July 2009 after getting 100 % proof of a trend change. But already in February 2009 our analysis warned us of a potential trend change. So despite market making new lows in the fall of 2009 and every "guru" on CNBC calling for further selling we stayed on the sideline. We wanted to preserve our capital for the potential trend change. Furthermore we did not want to give back the profit that we made on shorting the market in 2008. Needless to say we made the right decision back then and we believe we are making the right decision now by waiting this current market out.
We have many members asking for calls, either short or long and despite seeing other newsletters losing money when making calls in this current market our members seem to still have an "itch" in the trigger finger. We learnt the hard way because the more "itchy" our trigger finger was, the more we lost in trading. We started trading with the wrong idea in our head. We thought that, because the market is open 5 days a week then there are trades 5 days a week. Just like many of our mentors, we lost a significant amount of money before realising the truth about trading.
So, now we are adapting our strategy to the current market. We will still only call trades in a trending market but we are lowering our timeframe to 60 min. which is something we will do when we feel the market can support it. This does not mean we will not look at daily charts as we are still using daily charts for analysis, position size, stock scan and so fourth. So for example, when we are looking for long plays we look for trending market on 60 min chart that is in alignment with the daily charts and scan for strong stocks in strong sectors on both time frames. Bear in mind that as it is the 60 minute chart, the duration of the trade and the targets will be smaller. Another thing to keep in mind is the timing of the entry. Because the entry is based on a 60 min chart our members will have to be more active so we recommend that our members should only trade these calls if they are experienced and active traders. Furthermore we recommend that you start with either a paper trade or a very small position.
One last comment regarding a 60 min chart is that our studies show that the lower the timeframe, the more noise and fake signals. This is means that the calls on a 60 min chart will not be as high odds as on the daily chart.
To make it easy for you and for us at Stock-Market-Strategy we will divide the calls up into to portfolios:
- Rapid Portfolio
- Endurance Portfolio.
As previously mentioned, the market is in a sideways channel making trend trading impossible. So what we do is analyse the daily SP-500 to locate support resistance to make sure that our potential trades have a decent risk/reward. We then drop down to a 60 min chart to locate phase 2 or phase 4 that originates from those above located support resistance areas. We then scan and analyse stocks on daily charts, finally dropping down to a 60 min chart to analyse the current phase and look for setups.
By looking at the daily SP-500 we can see that we are coming up to resistance on the daily chart. This means that we are not recommending any long plays here as the risk to reward is terrible. Going long just before proven resistance and hoping for price to break the resistance is purely guesswork which we strongly believe does not belong in trading.
[caption id="attachment_730" align="aligncenter" width="300"]
Click on Chart[/caption]
[caption id="attachment_731" align="aligncenter" width="300"]
Click to see Phase Examples[/caption]
When price comes up to resistance on the daily chart we will then drop down to 60 min chart and look for either a phase 3 topping price action with a trend change into a phase 4 downtrend or sideways consolidation before breaking the resistance.
We will be scanning for both strong and weak stocks and as we do not know what the market will do, we have to be prepared for both scenarios. Preparation is important in trading as it helps contain the emotions when entering the market.
When the market makes up its mind at the daily resistance point then we will be calling some trades.