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The Time Element – Choosing the Correct Timeframe

Every trader knows that using multiple timeframes can provide different perspectives on the market, and provide key information on the lead-lag relationship. Small timeframes lead larger ones, and larger ones drive the smaller ones. Understanding the inter-play is crucial.

The Time Element - Choosing the Correct Timeframe

The Time Element – Choosing the Correct Timeframe

Since trends exist on different timeframes, it makes sense to analyse at least two timeframes. For example, if one’s main timeframe is the daily chart, one can consult the weekly chart to see the big picture. This allows investors to analyze a particular trend against the perspective of the next higher timeframe.

If one is using swing counts, a lower/higher high/low in the weekly and monthly charts can provide perspectives not seen in daily charts. Long-term trendlines may be clearer, and more obvious/easily visible. Certain price patterns are more visible on long-term charts (key reversals, triangles on weekly), as well as long -term support and resistance levels.

A trend change signal on the short-term (daily) may only be a retracement in the long-term (weekly) chart. On the other hand, a trend change signal in the long-term chart may be a substantial move in the short-term even though a short-term move may seem overdone. Hence, an overdone breakout on the short-term trend may actually be the start of a major breakout if the long-term chart is still on an uptrend.

Divergence signals are also more obvious when timeframe is compressed, for example a price-volume divergence is more obvious on the weekly compared to the daily. Divergences on the larger timeframes also point to larger moves, and could herald major reversals.

In conclusion, using multiple timeframes allows one to better identify trends, and more precisely pinpoint entries and exits by zooming in and zooming out from the initial point of reference. This also allows one to better manage risk in line with one’s time horizon and investment timeframe.

The Dual Timeframe Technique (NEW!)

The Only Two Things that Move Stock Prices

Despite what people may otherwise tell you or any preconceived ideas you may have, there are only two things that move stock prices. They are supply and demand – nothing more and nothing less. This is the foundation of basic economics as shown in the graph below. Since quantity remains the same, price is what fluctuates as a results of supply and demand.

If there is more demand than supply for a stock, then the price shall rise. Conversely, if there is more supply than demand for something, then the price shall fall. This is absolutely true in any market.

The next question is what affects the supply and demand for a particular security or traded instrument. Is it the profits in the financial statements? The upcoming expansion plans? The new product? Is it dividend payments? No one can be absolutely sure at any point why people may be buying and selling shares. That’s where technical analysis comes into play.

The Only Two Things that Move Stock Prices

The Only Two Things that Move Stock Prices

The next big revelation is that the bulk of supply and demand does not come from retail traders or retail investors. They come from the big boys (BB) and smart money (SM) like traders and fund managers in banks, funds and other institutions. They are the ones who move the market. Learning to interpret price action and volume is our window to tap into their psyche and profit from their actions.

Volume Spread Analysis – Spotting the Hidden Clues in Volume

Price action and volume lies at the core of technical analysis, since that is all the data a market technician works with. Almost all technical methods, such as chart patterns, candlestick patterns or even Elliot wave are studies of price action. Indicators like RSI, Stochastics or MACD are all calculated from price data as well. To understand the big picture, it pays to first understand the building blocks.

Volume Spread Analysis - Spotting the Hidden Clues in Volume

Volume Spread Analysis – Spotting the Hidden Clues in Volume

At the most basic level, price action is the movement of a security’s price. This encompasses all technical and classical pattern analysis, including swings, support and resistance, trends, etc. The most commonly known tools are candlestick and price bar patterns, which are ways of cataloging common price action patterns.

However, the crux about price action is not about memorising patterns and names. It is about understanding. That is what professional traders do. No two people will analyze every bit of price action the same way, and that is why a lot of traders find the concept of price action so elusive. That is why it takes experience to read price action.

Below is a useful picture summary of essential candlestick patterns:

Volume is the number of shares or contracts that trade hands from sellers to buyers during a period of time, and serves as a measure of activity. If a buyer of a stock purchases 100 shares from a seller, then the volume for that period increases by 100 shares based on that transaction.

Hence, volume is energy. It represents the level of commitment and participation by buyers and sellers, hence it indirectly indicates the supply/demand equation. Volume at times also serves as a leading indicator, because large movements in the market are due to the actions of market-movers (also known as the professionals or smart money), and these actions will show up in volume and price. At times,either of these two could provide the leading clues to future market movement.

The level of volume marks the significance of events – for example a breakout, a gap movement, or breaking a key support, etc. The higher the volume, the more significant these events are, because it shows more participation by smart money. In general, volume should be rising n the direction of the trend and decreasing on corrections, which would also be useful for identifying pullbacks in a trend. Watch out for unusual climatic moves in volume, for a climax usually results in a swift reversal or rebound.

The key is understanding the relationship between price and volume.

The 3 Essential Elements in your Roadmap to Success

Having studied many professional traders, I found that there are 3 crucial factors that have led to their success. All these market wizards have found success because they have understood and mastered the 3Ms of trading – Method, Money and Mindset.

Method (chart-reading): Process by which a trader enters into the market, using either technical or fundamental inputs to make their decision

Money (risk management): This includes capital allocation, risk parameters (drawdown limits), risk-to-reward calculations (entry price, profit target, stoploss)

Mindset (psychology): Market psychology the most important part of trading, and determines how well you can execute your trading plan in the markets in real time

The 3 Essential Elements in your Roadmap to Success - Wrong Allocation!

The 3 Essential Elements in your Roadmap to Success – Wrong Allocation!

To many new traders who know of these 3Ms, they tend to make the mistake of giving equal weightage to all 3 parts (refer to above), or even worse, almost 100% weightage to the “Method”. The most obvious danger is neglect to the other essential parts.

In reality, a professional trader should allocate the 3Ms as depicted below here:

“Don’t focus on making money; focus on protecting what you have.” – Paul Tudor Jones

Technical Analysis: The Basics of Reading the Market

Technical Analysis is the study of price patterns and trends in the financial markets so as to exploit those patterns. It is in effect applied mass psychology, for it studies the collective action of all market participants. The classical method focuses on analyzing behavioral patterns and patterns, while the statistical method uses formulas and statistics to find mathematical patterns.

Technical Analysis: The Basics of Reading the Market

Technical Analysis: The Basics of Reading the Market

 

In applying technical analysis, the same skills can be applied almost universally across different charts and markets, for example a head and shoulders pattern on a stock chart can be interpreted in a similar way to one one a forex or commodity chart. This is useful if you need an immediate opinion on a market that you know nothing about. The reason technical analysis works so well across different markets universally is because it analyses market psychology, which is the collective psychology of individual market participants.

In contrast with fundamental methods, technical analysis is much less time consuming, for example it can take as little as five minutes to analyse a chart, while doing a valuation on the same stock may take days. This is possible because market technicians believe that market action discounts everything, so instead of trying to figure out the “true” value of a stock by valuation, the technician allows the market to do that for him, by looking at the consensus of all market participants. In addition, technical analysis provides great timing and price projection tools, which cannot be found in the fundamentals.

Technical analysis is used to find opportunities when the probabilities are in your favour, and project possible paths and key levels that prices will reach. It is using past data to make a calculated guess of the future. It is NOT a crystal ball that can forecast the future.