Good Day Trading Friends – One of the biggest mistakes I believe people make when trading is not understanding time frames and how each time frame fits within the larger time frame. The trend is your friend as they say but what is the trend, what is the REAL direction? This can be very different all depending on the time frame which you choose to trade on. Here is one GOLD NUGGET of advice, probably one of the biggest pieces of advice that was ever passed on to me. There are only 3 time frames which positions in the market determine the flow (direction). Daily, weekly, monthly.
Let that sink in. Daily, weekly and monthly. If you compare 5 min chart to a daily chart the quality overall on the daily chart in terms of signals is much better. So here is a assignment. Start at a 1 minute chart compare all the signals to say one time frame higher the 5 min chart. As you move out in higher time frames the overall quality of signals gets better when you compare one time frame against the next higher time frame. On a 5 min time frame there might be 20 or 30 signals in a given 24 hr period but how many of those were good quality signals? Maybe 7, 8 or 10? Now compare that % to a 4 hr chart. In any given week there may be only 3 or 4 signals on a 4 hr chart but how many of those signals were quality? Probably most of them. As you move out in time frames the quality of signals get better. Look at a monthly time frame not a lot of signals but the signals that are given are good solid trades. So if the true direction of the market is made up by the daily, weekly and monthly charts what time frame will you get better quality trades on? You got it. Daily, weekly and monthly. If the monthly is up and the weekly is up we only want long trades on the daily or 4hr. For the real trend is up. No short trades. We want good quality trades and we want the true market flow on our side, that all happens when we trade off of larger time frames.