Different traders use different time frames for analyzing stocks and making their trading decisions. Trading can span from swing trading (holding stocks for 2-4 weeks) to intraday trading (holding stocks for 30-90 mins). This requires a trader to analyze stock charts in different time frames e.g. a swing trader might look at a daily or hourly chart whereas an intraday trader might look into a 5 or a 15 min chart. But should a trader only look at a single time frame? Or should a trader focus on other time frames as well when making their trading decision?
Why is a higher time frame useful for traders?
Higher time frame provides a big picture to a trader. It can prevent a trader from taking a position which might be right into an important daily level. Let’s suppose you want to take up a long position in a stock. The 15 min chart of the stock looks to be in a clear up-trend.
It might seem prudent for a trader to initiate a long position to ride the short-term trend. However, a close look at the daily chart shows that the stock is close to its long-term resistance level.
Analyzing a stock chart at a higher time frame can alert a trader to avoid taking up positions which are against the long-term price action. Always remember, stocks typically respect long-term levels much more than short term levels!
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It is not wise for a trader to take up a short position using the 15 min time frame when the daily chart shows a clear support zone on the daily chart. Similarly, it might not be wise for a trader to take up a long position using a 1 hour time frame when the weekly chart shows a resistance zone!
Examples of multiple time frame analysis
Multiple time frame analysis can be used by traders to get better entries in a trade or avoid bad trades which will eventually end up increasing their win rate. If you want to learn more about win rate in stock trading, visit this article!
Consider the chart of Reliance Industries on a 5 min time frame.
It might appear that the stock is in an uptrend due to the continuous higher highs and higher lows. However, zooming out from the 5 mins chart to the daily chart shows that the stock is range bound in the long term!
Such observations at a higher time frame can allow a trader to make better trading decisions.
Consider another example of the stock Mahinda & Mahindra. The 5 min chart shows that the stock is currently bearish & is in a down-trend.
However, looking at the daily time frame, it is quite clear that the stock is very bullish. In fact, the stock is currently trading at its all time high!
Problems with single time frame analysis
Many traders only focus on their trading time frame which can cause them to miss out on the bigger picture. Only focusing on a single time frame is sufficient, provided you have already figured out the stock movement in the higher time frame. A simple addition of multiple time frame analysis can cause a high increase in a trader’s accuracy, thereby increasing their profitability. The new information from higher time frame can help a trader fit all the pieces of the puzzle together to be on the right side of the trade!
Conclusion
A stock trader should focus on multiple time frames for his/her analysis. If the trader intends to enter a trading position in a lower time frame (5mins / 15 mins / 60 mins), then it is wise for the trader to understand the big picture in the higher time frame (60 mins/ daily/ weekly). This can increase the chances of a trader increasing his/her profitability which can lead to high profits. However, the final decision of trading depends entirely upon the reader.
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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