Time Frames & Signals
Time Frames
The Time Frame is the Bar Size on the time axis of the chart, for example Daily, 4-hour, 15-minute, etc.
The Time Frame of the chart affects how long (the Trade Duration) we expect the trade to last.
Swing Trades last one day to weeks. We want to use Daily or 4-hour charts to evaluate and capture signals for trades that will last the long.
Chosing the appropriate time frame is critical so signals from indicators occur on the time frame you are trading. For example, if you are making trades that last for several days (Swing Trading), then signals from RSI(14) on an hourly chart would not be appropriate.
For trading we will use a real time Daily or a 4-hour chart with the last bar showing the real time last price. We use a daily chart so that the signals generated are appropriate for trades lasting more than one day. If we were to use a lower time frame (such as 15-minute) the signals would be more appropriate for a day trade than a swing trade.
We note that a 4-hour chart has twice as many bars a Daily chart for the same time range because (during reular hours) there are two 4-hour bars for every day.
Signals
Let us look at some of the differences between trading a Daily chart vs a 4-hour chart:
- Moving Averages are in completely different orientations between the two time frames. Moving Average Crossovers occur in completrly places.
- Indicators are radically different.
- Trend lines and Support and Resistance lines are consistent.
- Chart Patterns are consistent.
- Candlestick Patterns are “broken into two pieces” and do not look the same.
From this I conclude:
- Signals should be taken from a Daily Chart.
- Moving averages and moving average crossovers are pretty worthless and should not be used to generate signals.
- Most indicators cannot generate consistent signals.
- Strategies should based on Support and Resistance, on Trend Lines, and on Chart Patterns to generate entry signals.
Trading would then be done with a real time Daily Chart, or the signal lines, levels and patterns can be copied to lower time frame where trading can be done in real time.