Most day traders focus their attention on intraday charts, and for good reason. They want to capture profit off of a product’s daily price movement, so it makes sense to study 15-minute, 5-minute, or even 1-minute charts. Those charts can provide great insights into great entry and exit opportunities.
However, focusing on the short term can be another way to bury an account. How? By not realizing that the higher time frame is in charge. That means that in a equity bull market (as we've had strongly for the past few years), there will be less opportunities to go short.
Traders who don’t understand where the market is going will have a hard time making money in it — even if they never hold a position past the closing bell.
Avoid Trading Against a Trend
You know how veteran traders like to say, “the trend is your friend?” It may be a cliche, but it’s a valuable one. Fighting the overall direction of the market is a losing battle. But if you only pay attention to 1-minute charts, it is easy to lose the trend in the noise.
Say, for example, you’ve studied a 1-minute chart for soybeans, and you’re convinced the market is going to go down. Every day you position yourself for what you think will be a big win. And every day you come out on the wrong side of the trade. A higher time frame, like a one-month chart, might have provided perspective and alerted you to how strong the trend was. That added context may not have changed your bearish mind, but it could have helped you pick a better time to sell.
The takeaway: The higher time frame is typically in charge. Use it to know if you’re swimming against the tide.
Make Better Educated Guesses
You wouldn’t let a carpenter who showed up without a hammer or a blueprint build your house. That would be crazy. They wouldn’t have the necessary tools to do a good job.
The same can be said for you. As a trader, information is your tool. Without it, you can’t make good decisions. Looking at one time frame chart won’t give you all of the information you need. Add in a higher time frame and you might notice important details in the price history, such as:
- A new high or low.
- Increased volatility.
- Long trends with minor pullbacks.
Short-term time frames can produce a lot of noise that distract you from key trading signals. Monthly and weekly charts can reduce the commotion so you can see opportunities more clearly.
The takeaway: To be a successful trader, you need all the information you can get. Higher time charts help you see the big picture so you’re aware of major changes.