Use of multiple timeframes in technical analysis
One of the nice features of technical analysis is that the same methods can be applied to multiple time frames.
It is also the case that studying a financial instrument over several time frames will provide a better analysis, with greater accuracy. By time frames, I refer here to the usual settings you can choose when you draw a chart. In most analysis systems, you can choose between time periods from minutes to months, and it is then the period for a simple candlestick or bar in respectively candlestick/barcharts that is referred to here. A 5 min chart then means that 1 candle/bar is created from the price movements - high, low, opening, closing - in 5 minutes. The most common settings for traders are:
- 1 or 2 minutes. This is often used by day traders who take very short-term positions, also called "scalping".
- 5 or 10 minutes. Often used in connection with the 1 or 2 minute chart by day traders, but there are also many who use e.g. 5 minute candlesticks as the minimum resolution in their trading systems.
- 30 minutes and 1 hour. Used by both day traders and position/swing traders. The latter two categories are traders who hold positions both intraday and over several days/weeks.
- 1 day. Many day traders have this as the highest resolution, but this is also often the main focus for position/swing traders and the even more long-term trend traders.
- 1 week. Primarily used by trend traders and swing traders, but there are also many more short-term traders who take a weekly look at the weekly chart to capture the bigger picture and see if there are special levels to be aware of.
Why use different time periods? Well, for one, it can help you identify trends. A trend is, after all, an underlying tendency for prices to move upwards or downwards. Whether the market is generally in an uptrend, downtrend, or a period of consolidation, is important to know when a trader should choose which methods are best suited for this market climate. For example, "buy-the-dip" is a good strategy if the market has an underlying strong upward trend, while the opposite "sell-the-rip" works better in bear markets. It is simply a matter of using the rule set that is best adapted to the underlying trend. This will improve the hit rate and make it easier to make money.
The second is that support and resistance levels can often be easier to spot on higher time frames. The fact that a share or index has previously turned upwards at a certain price simply means that there are buyers who are interested in taking new positions at that level. Many institutional investors can also be called position or swing traders, and it will have a clear impact on prices when they decide to buy or sell larger lots. It is important to know here that these levels can be both static (a fixed price, previous top or bottom), or dynamic such as, for example, a moving average. We will look at an example of this below.
The third is that looking at different time periods can help you improve your timing. For example, you can run a scan of the market to find the most overbought/oversold shares (more on this in a future article). The most extreme cases are put on a watch list and monitored daily on more short-term time frames with the aim of catching a turnaround early.
An example of multiple timeframe analysis
Below we first see a daily chart on Nvidia. The thick yellow line is the 100 day moving average and the thinner gray is the 8-day moving average. Both are among the most followed among both day- and swing traders. As we can see, the share has been above the 100-day moving average for the entire period covered by the chart, and thus in an uptrend. The shorter 8-day average captures the smaller trend movements around this. From the beginning of September, NVDA turned downwards and the 8-day moving average acted as resistance for upward reactions. When the correction reached the 100-day average, however, this served as support over several days with very small price movements. Let's jump to a shorter time period further down for further details.
As we can see from the shorter time chart, after being in a downtrend for the last few days, the stock has corrected upwards with a support level indicated by the line I have drawn in the chart. A horizontal line has also been drawn in which we see serve as resistance on several occasions until it is finally broken. The funny thing is that the support line exactly corresponds to the 100-day moving average in the higher time frame we saw on the first chart, and the resistance corresponds to the 8-day moving average. Definitely relevant for traders. Both selling the first test of resistance and buying the first break (and/or the test of the level) would be good trades.
Finally, I have also included a chart of NVDA over the last 5 years. The yellow line is the 20-week and thus 100-day moving average. Blue line is 40 weeks / 200 days. We see here that many corrections in the past 5 years have reversed at the 20 or 40 week averages, and that these are thus relevant levels to follow in order to capture the larger movements in the stock.
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