Forget chart indicators for a moment, and look at the longer view. Multiple time frames can tell you as much about a trend as any old MACD.
If the market were the Old West, right about now you might be “shooting from the hip,” reacting to anything that moves, and every market whim. But hold on there, trader. You now have electric can openers, as well as time to identify your target, take aim, and fire more thoughtfully. From a technician's perspective, looking at longer-term charts may also help you zero in before you pull the trigger on shorter time frames. Let's walk through an example of a bullish entry.
Sometimes the best way to identify your target is to find higher ground. In technical analysis, this means looking at a longer aggregation period than the one your trading signals come from. When using a daily chart for example, by comparing to a weekly chart, you eliminate insignificant daily movements and may see the direction more clearly.
Even from this hierarchy, applying a moving average to the chart can make things clearer. For example, Figure 1 uses a thinkorswim® chart, with a 26-week Exponential Moving Average (EMA). Though you may have a rising EMA, indicating bullish conditions, the stock still retains its cyclical behavior. As a result, notice the momentum is turning in your favor. For this purpose, we'll use the MACD Histogram set to the default (12,26,9) setting. A rising MACD shows the momentum is turning in the direction of the longer-term trend.
FIGURE 1: SECOND OPINIONS.
When sizing up a trade, using multiple time frames to confirm a trend, such as the weekly (left) and daily (right) charts of SPX, can help time entries (and exits). Chart from thinkorswim. For illustrative purposes only.
At this point, you're really trying to zero in on which day to enter the trade, using a daily aggregation period. Assuming you've identified your target correctly, you're going to key off the Slow Stochastics, using a (7,3) setting, with the “overbought” and “over sold” areas set to 70 and 30, respectively. Assuming the weekly MACD is still moving in the direction of the trade, an entry signal is based on the Slow Stochastics trading below 30 for a bullish trade, and above 70 for a bearish trade. With the long-term momentum turning bullish, and the short-term momentum at a bearish extreme, the stock may be poised for a move back in the direction of the long-term trend.
With a rising 26-week EMA, a rising MACD histogram on the weekly charts, and the slow Stochastics moving below 30 on the daily charts, the stock is in a position to enter an order (see table). The trading trigger could be pulled using a buy-stop order of say, $0.20 above the previous day's high. A protective stop could be placed initially 1-3 % below the low of the previous day or the entry day, whichever is lower.
For illustrative purposes only.
In a dusty barroom or on the trading floor, the best man almost always wins. Lining up your trade using multiple time frames may help give you a clearer view of your target—making sure you're trading in the direction of the longer-term trend.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Investools® does not provide financial advice and is not in the business of transacting trades. Investools, Inc., and TD Ameritrade, Inc., are separate but affiliated companies that are not responsible for each other's services or policies.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 TD Ameritrade.