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The Traders Wheel
10/3/99 by Alan Farley
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Time
Sophisticated technical indicators
evolve from simple data inputs of price and time. While most traders
understand how price patterns reveal hidden opportunity, many fail to
comprehend how time impacts both tactics and results. Lacking a skilled
understanding of opportunity cost, they misinterpret signals and waste
valuable resources. Or, trapped in common trend relativity errors, they
prepare trades in one time frame but execute them in another.
Opportunity cost defines how the trader
manipulates working capital. For example, this important concept reveals
why cutting losses efficiently is so important for long term survival. By
its nature, taking any stock position dictates that those funds will not
be available for another trade. This becomes a critical issue on account
drawdowns when individual trades can dictate success or failure for the
aspirant.
All trends in the markets are time frame
specific. For example, the existence of an uptrend in a daily chart says
nothing about the trend in the monthly or intraday chart. This highlights
the importance of correct time input in preparing technical indicators or
reading chart patterns. When improperly time-tuned, technical analysis
loses its effectiveness. Alternatively, resonant time readings will evoke
startling accuracy with otherwise mediocre data input.
Time Summation of indicators falls into
three general categories:
 | Moving averages of elements such as
price or volume |
| Relationships between the open,
close, high and/or low of individual bars |
| Repeating cycles of price or volume
behavior |
Time Period of indicators falls into
three general categories:
| Short Term |
| Intermediate Term |
| Long Term |
Individual units of time are best viewed
as relative periods, as opposed to daily, weekly or monthly lengths. Since
no two technicians trade in exactly the same time frame, patterns and
indicators must serve a broad range of uses. Fortunately, technical
analysis studies a fractal market. Valid predictions may be made with
indicators developed from 5-min bars or monthly ones in exactly the same
manner. But don’t be fooled: prediction can only be made in the same
time frame as the tools being used to study it.
Trends are dependent on the time frame
in which you are viewing them. While IBM shows a promising reversal taking
place on the intraday, the daily and weekly show a major correction in
progress. Notice how the weekly reveals an excellent buy point at the top
of the multiyear price channel, a support level completely missed on the
daily chart.
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Alan Farley is a full-time trader and
author residing in Denver, CO. He
publishes The
Hard Right Edge premier web
site for trader education, technical analysis and trader resources
featuring both Morning Trader and Traders Workshop. The site provides
traders with comprehensive resources including original tactics and
strategies on multi-trend technical analysis and short-term trading .
Alan also authors on-line training technical analysis in association with
independent sites. His most recent publications include the Mastering
The Trade on-line workshop, Momentum: Riding The Tiger, and Time of
Day. In addition to writing, he is an outstanding speaker and lecturer on
short term trading strategies.
He has been featured in Barrons, Smart
Money magazine, Tech Week, MoneyCentral and TheStreet.com.
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