Now that the catastrophic weather has finally left Texas, all that’s left is to pick up the pieces and move forward.
In last week’s post, we took a long look at why Consistency matters, and how you can profit from it by treating your trading like a business.
Let’s build on that by first inviting you to replace a bad habit with something that offers a tailored approach to trading.
I’ll bet that most of you are still evaluating potential trades with a single chart. Imagine covering one of your eyes and trying to properly gauge depth perception with only one eye. That’s what happens when traders attempt to evaluate market conditions by using a single chart with one setting.
Before taking a trade, you want to determine market conditions not only for the chart setting you’re using to take the trade, but also you need to step back and see the big picture. That way you avoid trading in a vacuum of information and can factor in information from higher setting charts.
This is certainly not new, and if you are a day trader, you will want to borrow the concept of a zoom lens when determining the settings for your other charts.
Far too many day traders use chart settings that are ridiculously high. Let’s put things in perspective. If you want the so-called big picture view of the market, that would be the equivalent of a wide-angle position on a zoom lens. As you zoom in closer you are only taking into account the most significant information, until you arrive at a chart setting that displays what I call low risk, surgical entry information.
Using a daily chart or even an hourly chart provides no useful information if you are taking day trades on very small setting charts (e.g., three minute or less). These higher chart settings have no impact whatsoever on day trades entered with smaller setting charts. By utilizing cycles analysis you can discover the optimum chart settings that provide you with a zoom lens effect, from wide-angle to close up.
Using the US indexes as a trading example (following this approach will yield the custom chart settings for other markets), you need to begin with a daily chart setting. Not the one that is listed in your drop-down menu in your trading application, but rather, by building a bar chart out of raw minutes.
For the US indexes, the number of minutes from their open at 8:30 AM CST until their close in the afternoon at 3:15 PM CST, is 405 minutes. Although these markets do trade 24 hours a day, with a brief interruption, the vast majority of the trading volume occurs during what is called the daytime trading session. By building your chart out of raw minutes you will get a far more accurate rendering than if you chose a menu selection from your trading platform.
This is just a starting point. From here, choose the next smallest integer (number) setting that divides into 405. That number is 135. A bar chart with settings that large is way too big for day trading, probably even for swing trading.
The next largest number after 135 that divides into 405 without a remainder is 81. At this point, you want to maintain a 3 to 1 ratio for the remaining chart settings. This is what will provide you with the wide-angle to close up range of settings you will use for actual day trading.
One-third of 81 is 27. A 27-minute chart is very close to the generic 30-minute chart setting that is listed in almost all day trading platform menus, but it is actually more accurate than the generic setting. However, it is still too large for actual day trading.
Now you will get the final three chart settings you can actively use for day trading the US indexes. One third of 27 is nine, one-third of 9 is 3 and one-third of 3 is 1. So, your three final chart settings are: 9, 3, 1.
The nine-minute chart reveals trending behavior for at least a half-day and sometimes the full day. The three-minute chart reveals the dominant cycle in effect for 1 to 2 hours. When you get the conditions for a trade entry you want to select the one-minute chart for a low risk, surgical entry.
These basic chart settings can be supplemented with tick charts to provide additional entry opportunities. You will want to use smaller tick chart settings that roughly correspond to a one-minute chart interval, like 144 tick and 233 tick. Please keep in mind that as order flow and volatility changes throughout the day your choice of chart entry setting will change.
Now that you have the basic formula for calculating your three chart settings for any market, you can experiment with other markets besides the US indexes.
This is just the starting point of being able to tailor your trading to match what the market is capable of giving you instead of approaching it with a one-size-fits-all generic setting.
In our next post we will show you how to gauge what the market is capable of giving you, based on trend agreement among these three charts. This will dictate how you will want to manage and exit your trades, instead of adhering to a single exit style.
That way you will be able to maximize both profit and Consistency. And as we emphasized last week, Consistency is the name of the game!