Tuesday, August 18, 2009

Situational Awareness

5 minute chart...

Click for larger, browser back.

Just a few candles ago, this was a Trade #1 buy. In fact, it did go up some. Then it pulled back. As I write, I see that it formed an M and pulled all the way back, forming a picture perfect bull trap.

My friend KM was considering buying on the 10 minute up-trend but I was able to talk him out of it. Here's why I did that...

30 minute chart, same stock, same time.

Click for larger, u know the drill.

Notice that the BBands are indicating a HUGE downtrend. Yes, there is recent wonderful strength, yes the trendline has broken (not illustrated here) but its still scary.

Here's the point:
When investing, or even scalping, we must be aware of whats going on in the other charts (and the SPY). A lovely uptrend in the 1 minute chart can prematurely fail because of a downtrend in the 60 minute chart. To say that another way, patterns on the one minute chart are not as powerful as the same pattern on the hourly.

And another way to say it:
If you buy it on the one minute chart, be prepared to sell it on that charts action as well.

This has many implications. The perfect world buy signal would be a signal on the daily, hourly, 30, 15, 5, and 1 minute charts at exactly the same time. I bet it happens, I've never seen it. Oh... and the SPY has to be in synch also. Too much for my little brain to look at all at once!

Here is a theoretical work-around. First, wait for the trade to come to you by observing a reasonable amount of charts. then buy on the one minute chart. After riding that a while, check the next chart up to ensure it is bullish there. Repeat all the way up to the daily and be aware of the weekly.

Now for the sell signal:
Once the opposite of a buy signal is observed on the daily, continuously drill down to faster and faster charts for confirmation.

Who is gonna do this? Not me! Too much work. I will just set a stop under the previous low (adjusting occasionally as needed) and wait for it to trigger.

As always, your comments and questions are welcomed.

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