New day traders often tend to be hyper-focused on the intraday time frame. And while concentrating on the short term makes sense for most day traders and scalpers, it’s important to zoom out and look at the big picture. Shay from Humbled Trader recommends using a longer time frame as confirmation even if you trade only within the 1-5 minute range.
Let’s use an example: a stock is breaking through, looking like a great candidate for a short trade. And even if you look at the daily picture, you might see that it’s reaching a new daily high. For many traders, that would be enough of a signal to short the stock right away.
However, it is still possible for the trade to go against you as the ticker keeps climbing. Humbled Trader often consults a 52-week chart and even an all-time chart to see how often the stock tends to reach a new high. If this is its typical behavior, shorting a stock as it’s going through another breakthrough will only lead to a loss as the new high will likely be met with little resistance.
The same applies to stocks that are breaking out on the low side. If a stock consistently hits an all-time low within multiple timeframes, do not try to go long. Based on its history, this stock might turn out to be a better short once it pops back up for a short period of time.
So while it’s true that day traders tend to trade the range within the intraday volatility, it’s important to keep an eye on the bigger picture. Shay suggests using multiple timeframes for confirmation. Keeping an eye on hourly, daily, 52-week, and all-time charts in addition to the 1 or 3-minute charts will give you much more insight into the stock’s tendencies.
To get into the habit of checking the longer timeframes, get used to recording this information for each trade you make. When you’re journaling your day and saving your execution data, make notes of what the daily chart looked like for each ticker. Better yet, save the daily charts alongside your execution charts. This way, you can see how your trades line up within the daily chart of the stock. Your data may even suggest that you might benefit from extending your timeframe. Undoubtedly, this is a great type of information to have on hand if you decide to adjust your strategy.
These suggestions are key principles Humbled Trader’s Shay abides by. Not every breakthrough leads to resistance, and not every short-term chart can tell a full picture. Collecting as much information as you can before entering the trade may lead to better-informed decisions, and seeing a big picture of stock’s behavior can help you trade much more efficiently and avoid unnecessary losses.
If you’re looking for more information on day trading, make sure to check out our educational resources on the Cobra Trading website and Youtube channel.