Charting Wealth, The Book, Chapter 4, Understanding Time Frames
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When you look at a stock chart, what are you actually seeing? It is price movement within some moment of time. It may be what the S&P 500 or the NASDAQ 100 did within the course of a year: up fifty percent or down one-third of its value. It could be what gold did last Friday or what bonds did last week. Timeframes are important because they give us the ability to quantify and chart price movement during a certain period of time, thereby allowing us to determine what actually occurred. Analyzing multiple timeframes of price movement in an underlying equity (stock, index or ETF) is even more helpful in locating an all important price trend.
Time frames are waves of price flow. The larger the timeframe, the bigger the wave. The bigger the wave, the more power the timeframe has. Why? Bigger waves (larger time frames) have more inertia, move for longer periods of time and equate to more profit. It should be self-evident that larger waves are made up of smaller waves. Think about it: it takes 12 five-minute time frames to make up one 60-minute time frame. The inertia of a larger frame occurs due to the past movement of smaller timeframes. Over time, the smaller charts stack up enough energy to modify the movement of larger charts and even change their direction. We have a default saying: “All things being equal, the market tends to move in the direction of the larger timeframe.”
When charting the market, you may use any timeframe you wish. Through tried-and-true effort on our part, we have chosen to use the weekly, two-day and the four-hour (half-day) timeframes. Why? We have found these timeframes, working together, provide us with the best trends and entry points for making successful trading and investing decisions.
Note: we are not day traders and these are not day trading charts.
We look for trends on our weekly and two-day charts and employ the half-day chart to locate entry points for established trends. We are continually cognizant of the weekly chart since it is our largest chart and “All things being equal, the market tends to move in the direction of the larger timeframe.”
Ideally, we desire to see the trend on the two-day chart also moving in the direction of the weekly chart, but such an arrangement is not always required. Why? At some point the weekly chart will rollover in the opposite direction and we will wish to enter into positions prior to that event occurring. Such actions can be dangerous because the market may choose not to reserve, but with experimentation this strategy can work very well. There are many timeframes. We have chosen to use just three. As you learn to read the charts, feel free to explore and experiment with other time frames.
The one constant in the market is change. Be willing to learn our method, but do not ever be afraid to try new things and other methods. Feel free to employ the ideas you have. It costs you nothing to experiment and make multiple virtual trades all the time. You can also experiment with other ETFs, indexes and every stock in the market.
The bottom line, the reason we are learning to read stock charts, is to make money. Never forget this fact. We wish to locate price trends and jump into the flow so we can profit from the increase in the value of the equity. Commit yourself today and forever to stop using any technique that does not work or stops working.
Your techniques must be successful, time and again. The prior sentence is merely a statement of the obvious, but you would not believe the number of people who, in spite of all reason, commit themselves to ideas, beliefs and systems that are outmoded and do not work. Above all else, you must have a system that accurately assists you in determining if the equity being analyzed will go up, down or sideways. It’s just that simple and straightforward.
Our system of using charts is just your starting point, it is not your ending point. Take our knowledge, grow with it, learn from it and modify it in your own system. Mutation, adaptation and evolution are not dirty words. They are all encouraged, as long as they work!
If you have questions or comments on this chapter we would love to hear from you as we continue to put this book together. God bless!
Let’s move onto chapter 5!
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At ChartingWealth.com, every day the market is open, we chart the S&P 500, the NASDAQ 100 (tech stocks), 20-Year Bonds and Gold. In just a few short minutes, we give you a valuable training update and quickly review the trends we see taking place in the market. At the end of every week, we give you an overview of what happened over the last five days and what’s on the calendar for the next trading week.
With our stock chart training we focus on developing our skills in technical analysis. This activity is the forecasting of future financial price movements based on an examination of past price movements. Like forecasting the weather, technical analysis does not result in absolute predictions of the future. Instead, we try to anticipate what is “likely” to happen to prices over time. Technical analysis can use a wide variety of charting time periods and indicators that show price movements over time.
Since our objective with stock chart training is to predict future prices, it makes sense to focus on price movements. Price movements usually precede fundamental developments. By focusing on price action, technicians are automatically focusing on the future.
The market is a leading indicator and generally leads the economy by 6 to 9 months. To keep pace with the market, it makes sense to look directly at the price movements. More often than not, change is a subtle beast. Even though the market is prone to sudden knee-jerk reactions, hints usually develop before significant moves. We see the hints in our charts.
Our simple stock chart training, reviews and analysis can help identify support and resistance levels. These levels are usually marked by periods of congestion within the trading range where prices move within a confined area for an extended period of time. This limited movement tells us that the forces of supply and demand are deadlocked. When prices move out of the trading range, it signals that either supply or demand has the upper hand. If prices move above the upper band of the trading range, demand is winning. If prices move below the lower band, supply is winning.
Technical analysts view the market to be 80 percent psychological and 20 percent logical. Fundamental analysts consider the market to be just the opposite – 20 percent psychological and 80 percent logical. Psychological or logical is open for debate, but there is no questioning the current price of a stock, index, commodity, ETF or option.
Price is available for all to see and no one can doubt its legitimacy. The price is set by the market and it reflects the sum knowledge of all participants. These participants have considered and discounted all available information and settled on a price to buy or sell. The price shows the forces of supply and demand at work. By examining price action to determine which force is prevailing, technical analysis focuses directly on the bottom line: What is the price? Where has it been? Where is it going?
Even though there are some universal principles and rules that can be applied to stock chart training, it must be remembered that technical analysis is more an art form than a science. As an art form, it is subject to interpretation, but it is flexible in its approach. Each investor should use only the techniques that suit his/her style. Developing a style takes time, effort and dedication. The best news of all is the rewards can be significant.
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We standby the proverb, taken from Confucius, the Chinese master of wisdom: “Study the past, if you would divine the future.”
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