Trader’s Narrative

Yesterday, Maoxian left a comment about my use of a 2 minute interval to find a ‘dummy’ entry and I wanted to explore this topic a bit more.

Due to the fractal nature of prices, technical analysis can be applied with equal validity to almost any time frame: minute, hour, day, week or even monthly prices. Trendlines can be drawn, moving averages calculated, indicators plotted, etc… in fact, if we remove the reference to time, most people wouldn’t be able to distinguish a 5 minute chart from a daily chart or a weekly chart.

Of course, when you approach extremes (say, a tick chart or an annual chart) then things are either moving so quickly that you lose track of the bigger trend or things are moving so slowly that by the time you react, the trend is over. So there is a sweet spot. But the range it contains is quite large.

Alright, then how do we decide which timeframe to use? a 2 minute chart or a 5 minute chart? or how about a 15 minute chart? what is wrong with a 30 minute chart?

The answer I think is it depends.

There really is nothing wrong with a 2 minute chart, nor is a 15 minute chart inherently better than, say, a 30 minute chart. They all are snapshots of previous market action. And they each will present varying degrees of opportunity.

So why did I use a 2 minute chart?

Well, I knew that after the Fed announcement, the market would be a fast one with prices whizzing by with enormous speed and volatility. I wanted to zoom in on the exact opportunity that this volatility presented. And so, by default, I had no better option than a very small time frame.

Needless to say, the more short term your focus, the more rapidly you’ll have to react. Event driven markets, like yesterday’s Fed annoucement, are rare. For more normal market conditions, and a more leisurely pace, pick out a longish time frame. Say, 15, 20 or even 30 minute charts.

The point is that you have adapt to the market, not expect the market to adapt to you. If its a fast market, drill down to a smaller time frame. Otherwise, you may not even get a low risk entry.

As an example, consider a stock that lit up many a filter today: unusual volume, high trade count, gap up, and heavy premarket activity:

Premarket was very active with GM shares moving up extremely fast from $27.50 to $31 in no time flat. This is not a fiber optic company and I checked the calendar, it is not 1999. So this is your first hint that trading conditions are not ‘normal’ for GM today.

Towards the end of the pre-market session, we have an inverted hammer with a very long upper tail (red arrow). This is a sign of buying exhaustion. Right after the regular session, price begins to tumble down from the lofty mount it attained in pre-market. There were two pauses where a low risk short entry was possible (red circles).

Now take a look at GM’s 15 minute chart:

The only chance you had was to get short right at the open, based on the pre-market action - below the long tailed doji. Other than that you had no entry offered on the 15 minute chart. And if you were not watching the pre-market session, you would have even missed the signal right at the open.