Volume Based Technical Analysis
Using Several Charts
One of the common mistakes that some traders resort to is remaining with one timeframe. The following statement is wrong. "I'm an intraday trader and I only need streaming real-time 1-day charts." If you always analyze only one timeframe, you are missing two things:
- You do not see the overall picture and are missing the parent trend, which is critical in defining a trading strategy and reducing losses.
- Less critical, but still important, is that you are missing an opportunity to see when the price is predisposed to changing its trend.
It is not just about volume based technical indicators. The two points above hold for price based technical analysis as well. it is highly recommended that you have a longer time-frame chart for a parent trend analysis in addition to the chart timeframe that you trade. There is no need to devote a lot of time to parent trend analysis. For instance, if you trade a 1-day chart (1-bar = 1 minute) and monitor the daily chart in real time, it might be enough to take a look at 15-day (1 bar = 15 minutes) and 60-day (1 bar = 1 hour) charts once a day after the market close or before the market opens to see the general tendency of the traded stock/index - that is, where it is trending in the longer-term. Without a knowledge of the parent trend, any trading system will fail as soon as the parent trend changes its direction. Changes in the parent price trend are a cause of the changes in the price behavior in shorter timeframes. As an example, here are a few points that show the direct relation between the time-frame you trade and parent time-frames.
- If a price trend on the longer time-frame chart can be defined as up-trend, then on a lower time-frame (time-frame you trade)
- a stronger "sell" signal is required to open a "short" trade while a weaker "buy" signal can be more profitable;
- some "sell" signals can be ignored (fake signals), although the majority of "buy" signals will be profitable.
- If a price trend on the longer timeframe chart can be defined as a down-trend, then on a lower time-frame (time-frame you trade)
- a stronger "buy" signal is required to open a "long" trade while a weaker "sell" signal can be more profitable;
- some "buy" signals can be ignored (fake signals), although the majority of "sell" signals will be profitable.
Many other signals and price behavior characteristics that depend on the parent trend can be brought up. However, the points already mentioned above provide a strong advantage in adjusting a trading system to a parent trend. For instance, a trader may chose to trade only "buy" signals during the parent up-trend and to trade only "sell" signals when the parent trend can be defined as a down-trend. The S&P 500 chart below demonstrates this principle.
Chart #1: the S&P 500 60-day chart with two moving average
that define the parent trend as an up-trend
The 60-day (1 bar = 1 hour) S&P 500 chart (chart #1) above defines the parent trend for trading the trading 5-day (1 bar = 5 min) S&P 500 chart below (chart #2). One of the simplest ways to define the parent trend is by using two simple or exponential moving averages. On chart #1, a fast exponential moving average is moving above a slow exponential MA. In addition, the parent trend on this chart is defined as an up-trend.
On chart #2 (see S&P 500 chart below) simple trading system that uses an SBV Oscillator that is modified to react only to "Buy" signals and use "Sell" signal to switch into "cash" by simply closing any long position without initiating a short trade. This trading strategy is known in technical analysis as "trading along the trend" or "do not trade against the trend." The basic rule of this strategy is to trade only those signals that support the parent trend. Since, in the period from November 4 until November 18, the parent trend is defined on a 60-day chart (chart #1 above) as an up-trend, only "buy" signals are traded on the 5-day (November 6-10) chart below and all "sell" signals are ignored and are used to switch into "cash."
Chart #2: the S&P 500 5-day chart with "buy" signals only
to trade along the parent trend defined by the S&P 500 60-day chart
As you can see, the knowledge of the parent trend will help you to adjust your trading to the parent trend. While some small signals might be missed, the majority of profitable trades will be caught and the majority of fake signals will be avoided. The principle of "trading along the trend" is usually used in options trading when a trader prefers to avoid the risk involved in trading against a general market trend and prefers to have fewer, but more conservative, trades.