Always Look to the Left on a Chart, But How Far?
- Posted by Greg Harmon
- on February 25th, 2011
Traders use all sorts of timeframes and time spans when looking at charts. But what is the proper mix to look at? The answer depends on your reward to risk measure and where the price is in relation to the that measure. Let’s look at some charts to explain this. I will use the ratio chart of XLE, the Energy Sector ETF, to Gold to explore this, to try to remove any bias from your thinking, but any chart would do. Below is a 1 year daily chart of the ratio.
This chart shows the ratio in an ascending triangle. A break out higher could run up to a target of 0.059 on the pattern quickly. This could be expected to happen within 1-2 weeks after the break out. But what happens after that? This time span cannot answer that. Now look at the same ratio on a 3 year time span still on the daily chart below.
The picture changes slightly now. This chart shows the ratio has been in a channel for 2 years between 0.039 and 0.056 as it presses against the resistance at the top again. From this picture a move through that resistance would look for a target of 0.072. No mention of the 0.059 target from the previous chart. The time that the price was within this channel would suggest it could take a long time to achieve that target or it might drift when it gets there.
But back out even further and notice on the lifetime chart of this ratio, that the price, prior to entering the channel, had been above 0.056, for over 10 years! This would suggest a long term hold could be appropriate when and if the break out occurs.
So which is the right time span? They all are. The short time span works for a trader looking for a quick 5% potential trade and then will move onto another name, or drop it if it does not happen. The intermediate time span works for a trader that will hold for several weeks and the longer time span works for an investor who will only look at the trade infrequently. That is not to say that long term holders should not look at shorter time spans. They should, as this can help in adjusting stops and entries into trades. And short term traders should know that if they get out after a 5% move that they are potentially forgoing another 10 or 15%. But when When you do your analysis ask yourself which type of trader you are and then focus your homework accordingly.
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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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