The Traders Wheel
10/3/99 by Alan Farley

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:

Time Period of indicators falls into three general categories:

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.

  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.