The New Trading For a Living by Alexander Elder

Author:Alexander Elder [Elder, Alexander]
Language: eng
Format: epub
Published: 0101-01-01T00:00:00+00:00

The Factor of Five

Most beginners casually pick a timeframe that looks good to them—it can be a daily or a 10-minute chart, or any other—and ignore others. Few are aware of the fact that the market lives in multiple timeframes. It moves simultaneously on monthly, weekly, daily, and intraday charts—often in opposite directions.

The trend may be up on the daily charts but down on the weeklies, and vice versa. Which of them will you follow? And what will you do about the intraday charts, which may well contradict either the weeklies or the dailies? Most traders ignore all timeframes except for their own—until a sudden move from outside of their timeframe hits their account.

Keep in mind that neighboring timeframes are linked by the factor of approximately 5. If you start with a monthly chart and proceed to the weekly, you’ll notice that there are 4.5 weeks to a month. As you switch from a weekly to a daily chart, you know that there are 5 trading days to a week. Turning to intraday analysis, you may look at an hourly chart—and there are approximately 5–6 hours to a trading day. Day traders can proceed even further and look at 10-minute charts, followed by 2-minute charts. Each is related to its neighboring timeframes by approximately the factor of five.

The proper way to analyze any market is to review at least two neighboring timeframes. You must always start with the longer timeframe for a strategic view and then switch to the shorter timeframe for tactical timing. If you like using daily charts, you must first examine weekly charts, and if you want to day-trade using 10-minute charts, you first need to analyze hourly charts. This is one of the key principles of the Triple Screen trading system (see Chapter 39).

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