Time Frame Scaling
Stockscores.com Perspectives for the week ending November 23, 2008
| Get the StockSchool Pro Free |
DisnatDirect named the number one Canadian brokerage for Traders by Surviscor! Open and Fund a brokerage account with DisnatDirect and receive the StockSchool Pro home study course free, including special Pro level access through the DisnatDirect client website. Offer only available to Canadian residents. For information, click here
|
|
In this week's issue:
This is obviously a very abnormal market. That means you have to approach it in an abnormal way without deviating from the important principles that all traders should keep in mind. You can come up with some new strategies that are still based on sound theories of risk management, emotional control, chart pattern analysis and use those strategies to make money.
It is a difficult time for traders with a longer term hold period expectation. In the daily edition of my newsletter, I have made very few position trade features over the last few months. I think that the market is too difficult to predict if you are looking out more than a few weeks. The shorter term trader has been presented with great trading opportunities because of the extreme volatility but trading in this way requires more attention, something that not everyone can afford.
The market was down again this week; the farther it falls the closer it gets to a bottom. Yes, one day this market will make a bottom and it will go in to an upward trend again. How do you capture the majority of the comeback? Using something I call Time Frame Scaling.
Let's take a very simple concept of chart reading. The first step in a trend turnaround is a break of a trend line. Buying stocks that break a downward trend line is an aggressive way to buy near the bottom and enjoy much of the gains if a comeback does occur. It is not a super reliable method, particularly with picking down trend reversals, but with good risk management it can be a profitable, and simple, strategy for making money.
This strategy also offers a lot of choices. What chart period time frame should you use when looking for a break of the downward trend? Weekly, Daily, 60 minute, 30 minute, 15 minute, 5 minute or 2 minute are all chart time frames that I consider when looking for trading opportunities. In this market, the difference between entering on a signal from the 2 minute chart versus the daily chart can easily be more than 20 or 30%!
So, why not use all time frames to find entry signals?
We could look for entry signals on the shortest time frame and then add to those positions as we get new entry signals on longer term time frames. In this way, we scale in to a position as it becomes more and more profitable. If the trend reversal really sticks and leads to a multi week or month trend, we build a large position without taking a whole lot of extra risk.
Here is what I mean. One of the instruments that I like to trade right now is the Proshares Ultra S&P 500, symbol SSO. The market made a turnaround from weakness on Friday and the 2 day, 2 minute chart of SSO showed a break of the downward trend line at about 3:30 Friday afternoon. At that time, the intraday chart also gave a confirmation flag breakout pattern.
So, you could buy SSO at about $20 with a stop loss point at the previous inflection point low of $19.55. That meant you had $0.45 a share in risk on the trade. Buy 1000 shares, your risk is $450. If the trend line break does not work, you will take a loss if the two minute chart closes below $19.55.
By the close of trading, the SSO had rallied up to $21 and was hitting the downward trend line on the 5 day, 5 minute chart. We expect the market to stall at this downward trend line, but if it is able to break upward through that trend line then we will get a buy signal on the longer term 5 minute chart time frame. That could happen Monday morning.
If it does, we add to the position and raise our stop loss point upward to last inflection point low on the five minute chart. In doing this, we protect some of the profit from our initial entry position which allows us to increase the size of our position with this second entry.
Suppose Monday morning gives us a little pull back to $20.50 before the market rallies again and breaks the 5 minute chart downward trend line with a 5 minute candle close at $21.50. A new position will have $1 per share in risk but our initial position will have $0.50 a share in profit if we get stopped out. So, if we did not want to have any more than $500 in total risk, we could buy another 1000 shares of SSO. The first position would have $500 in profit if we get stopped out, and the second position will have $1000 in downside risk ($1 a share times 1000 shares) leaving a total risk of $500. But, we have twice the position size if the trend reversal is able to continue.
And then, we can begin to watch the 15 minute chart for a break of the 15 day trend. And if that trend line is broken, we will add to the position and look for an entry on the 30 minute. And then on the 60 minute chart. And then the Daily chart.
Chances are not great that we will get all the way to a break of the downward trend line on the daily chart, but it is possible and it will eventually happen. When it does, we will have built a large position that will be extremely profitable. If it fails to happen, we might take a small loss or perhaps a profit if we scale in efficiently.
Trading well has more to do with effective risk management than it does with knowing what trades to enter. Time Frame Scaling is a great way to maximize profits when you are right and minimize losses when you are wrong. It takes great discipline and patience but can reward those who achieve success with a very abnormal profit.
Back To Top
History has shown that bounce backs from emotional and irrational sell offs has led to very good returns. The challenge is timing the market effectively to take part in the majority of the bounce back. The markets made good gains on Friday but only gave a bounce back signal on the very short 2 minute time frame. Any longer time frame remains below its downward trend line.
The good news about that is you have probably not missed out on the opportunity yet. The bad news is that a turnaround here is not that probable yet. It is still worth trading, just don't bet the farm on it.
I think the market will probably be down in the first hour or two on Monday. It may continue lower through the day and negate the bounce signal that came on Friday. However, it could also break the 5 day downward trend line later in the day, giving a second signal that we have reached bottom.
As traders, watch for a break of this trend line as a cue to buy a market index ETF like the SSO, DIA, T.XIU etc.
If you are a longer term trader or unable to watch the market that closely, wait for a break of longer term trend lines on either the 60 minute or daily charts. They will come eventually.
Trying to pick a bottom is like trying to catch a falling knife. Make sure you practice good risk management and be willing to take a loss at your stop loss point if the market proves you wrong. Failure to do that could lead to a lot of pain.
Back To Top
References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
Back To Top
|
