Good morning Folks and Happy Friday.
This will be the last post for the week. I will try to do a video this weekend. It's a big weekend, I have some friends coming in from out of town to celebrate making it through another year of life. Odds are I will be doing my best to damage some brain cells. I hope the posts are helping. Have a great day trading.
Multiple Time Frames
I stated earlier that aligning a stock on multiple time
frames can give you a powerful setup. Once you establish what type of trader
you are going to be. You need to start familiarizing yourself with the time
frames that work best with your style of trade. The time frame widows can vary
to each individual’s personal preference. There is nothing that says if you are
a day trader you must work within the daily, 30 minute and 5 minute time
frames. I know of traders that will use the daily the 15 minute and the 3
minute timeframes. This is something you will have to play around with to find
which time frames provide the best results for you. What is most important is
that you understand and fully comprehend the concept of aligning a stock on
multiple time frames. This was something I had a very difficult time with when
I first started out on my journey of being a day trader. I still remember the day when I was trading a
stock and all of a sudden the light bulb went on. I saw the multiple time frame
alignment and I executed the trade with complete confidence, it was a huge
turning point for me. So why is multiple time frame alignment so important? It
isn’t a guarantee that your setup will succeed but it does add to the validity
of the setup if you can get an alignment on multiple time frames. You may
choose to work with only two time frames I personally like to use three.
Figure 8 Breakout on
multiple time frames Day trade
Figure 9 Breakout on
multiple time frames Swing
Figure 10
Breakdown alignment swing time frame
Figure 11
Breakdown alignment day trade time frame
As you study the examples,
notice how the different time frames align at specific price points. By
identifying the breakout or breakdown area on multiple time frames you should
be able to find your ideal entry point which will give you a higher probability
of success with your trade. By looking at stocks on multiple time frames you
can also identify areas of congestion where there is likely to be built up
supply; former price resistance or support, moving averages, and other
indicators you may have a preference for like Bollinger bands, and Fibonacci
levels. Knowing where these areas are on the daily for example could help your
determine what your risk reward would be on a day trade before hitting some
form of resistance or support. See the example below.
Figure 12
Support and resistance areas Day trade
So taking the example above one could assume that there is
relatively strong price support on the daily at 2.60 with the 50 day moving
average. There is also support on the 30 minute and the 5 minute at the 2.60
level. One could also assume from the daily that there is likely to be
resistance at 3.59 and stronger resistance at the 200 day moving average around
3.85. Entering a trend line break at 2.72 would be risking 12 cents if you
placed your stop at 2.60. Knowing where the resistance is on the daily helps
you set your targets. Typically there is at least some resistance at round
numbers which I will go into later when we go through individual setups. $3 may
be the first target to scale out some of your trade. 3.30 may be the second
target since there has been some congestion there and 3.59 may be your final
target. If the trade goes perfectly you are risking 12 cents to make 87 cents
which is roughly an 8 to 1 risk reward ratio. The worst case scenario is
risking 12 cents to make .28 cents if it only hit 3 dollars which is still a 2
to 1 risk reward scenario. Paying attention to volume on the breakout will help
you determine what target the stock is likely to achieve. Looking at multiple
time frames and aligning them should be a critical component for every trader
regardless of the type of trader they are long or short biased, or the duration they
intend to hold a stock.
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