Understanding Time Frame Importance

"Discipline yourself, and others won't need to."

-- John Wooden

Multiple time frame analysis, and understanding one's trading or investment horizon, are two entirely different concepts. Both concepts, however, are equally important and must be thoroughly understood by anyone hoping to prosper in the field of trading or investing.

Multiple time frame analysis involves the study of a specific instrument, over several unique time frames. The basic idea behind this practice is to determine if one is trading, or investing, in the direction of the longer, intermediate and shorter term trends. Or, at the very least, it can alert the trader that he may be trading against a prevailing trend.

There's no rule that says a trader can't trade against a prevailing trend. It is, however, only logical to assume that an entirely different game plan would be put into play if one were trading in the direction of a shorter term trend -- but against a longer- or intermediate-term one.

Understanding one's trading or investment horizon is a more complicated and personal concept. And in order to select a time frame, you must first understand where your comfort zone lies when it comes to making decisions that will result in you either making, or losing, your own money. In my experience, trading or investing in a time horizon with which one is uncomfortable generally ends poorly.

Do you break into a cold sweat and begin to panic when a trade moves 50 cents against you? Does the idea of sitting in front of a computer screen for five hours a day bore you to tears? Do you begin to fall asleep when you've sat in a trade for two hours? Does your back tense up and begin to twitch at the thought of holding a position over overnight? These are just a few of the questions one must mull over before determining which time frame best fits one's particular personality.

If you prefer to take your time when it comes to making trade decisions, allowing yourself the flexibility to analyze a half-dozen different scenarios, then focusing on a 1-minute, a 3-minute or a 5-minute chart probably makes very little sense.

Conversely, if your goal is to trade an instrument's intraday rotations, focusing less on an existing weekly or monthly trend, and more on fading moves away from a current session's intraday's value, then utilizing shorter-term charts makes infinitely more sense.

Day traders, especially those that typically begin and end the day in cash, would likely benefit from analyzing a 30-minute or a 60- minute chart (longer term trend). Then, they can adjust their focus to a 10-minute or a 15-minute chart, to better determine the instrument's intermediate term trend. And concluding their analysis with a review of a 1-minute, a 3-minute or a 5-minute chart, for a clear understanding of the short-term trend. As for my own trading, I'm most comfortable using a 30-minute, a 15- minute and a 5-minute chart. However, when the market is moving especially fast, I'll often utilize a one-minute chart as well.

If you have additional questions in regards to multiple time frame analysis, or understanding one's trading time horizon, please don't hesitate to shoot me an email bobbyrne@comcast.net, or hit me up on twitter @ByrneTSCM .

At the time of publication Byrne had no positions in any stocks mentioned in this article.