Look At the Big Picture

November 19, 2007 at 6:26 am · Filed Under Educational 

Torch

Quick, where was this picture taken? If you recognized this as the torch from the Statue of Liberty, maybe you guessed New York, but you’d be wrong. And yet, this is exactly how a lot of people read stock charts, a quick glance at a chart without any context. I’ve briefly mentioned before that you should match your chart periods to your investment time frames. You won’t find good buy points on intraday charts for long term trades, and day trading off weekly charts would be equally futile. However, just because you should set your buy points on a given chart doesn’t mean you can’t gain something else from the others.

Stocks make the strongest moves when there is a lot of money behind the move. While you may only look to hold the stock for a short period, there are still many other people buying and selling the same stocks as you—some which may have the same investment timeframe as you, but many others don’t. While breaking out of a 60 minute base is good, breaking out of a year long base is much stronger. Trading against the longer term trend means you’re fighting all of the longer term traders and investors out there, making your shorter term trade an uphill battle still.

Sometimes I’ll see a stock that’s up 15% over the past couple of days, but when I look into it I notice that it’s down 60% over the past few months. In this case, I would avoid bullish trades in any timeframe. I would only day trade it (short) on a down day, and I would only open up a longer term short position if it hit resistance or broke through support on the daily or weekly charts again. Sure, there might be some perfect setups to bullish day trades along the way, but I don’t consider those to be high percentage plays in the context of things.

How far back do you need to step? Normally I’ll go at least one level farther. Day trades deserve a look at the daily charts, swing trades deserve a weekly look, and longer term trades deserve monthly looks. Being focused can be good at times, but you need to ensure you aren’t ignoring the rest of the story. What might look like a great trade today may look like a dog with fleas once you take the last month into account. You can often gain quite a bit of insight from stepping back and surveying the whole scene. Only after doing so will you be able to see the true colors of a stock or that the picture above is actually from Las Vegas.

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