Volume Indicators

One of the common mistakes some traders may run into is stacking with one timeframe. The statement "I'm an intraday trader and I only need streaming real-time 1-day charts" is wrong. If you analyze only one timeframe all the time you are missing two things:

1. You do not see the general picture and you are missing the parent trend which is very critical in defining a trading strategy and reducing the losses.
2. Less critical, yet still important is that you are missing the opportunity to see when the price is predisposed to change its trend.

It is not just about volume based technical indicators. The two points above are correct for price based technical analysis as well. It is highly recommended, in addition to the chart timeframe you trade, to have higher time-frame chart for a parent trend analysis. There is no need to devote a lot of time to parent trend analysis. For instance if you trade 1-day chart (1-bar = 1 minute) and monitor daily chart in real time, it could be enough to take a look at 15-day (1 bar = 15 minutes) and 60-day (1 bar = 1 hour) charts once a day after the market close or before the market opens to see the general tendency of the traded stock/index - where it is trending in longer-term. Without a knowledge of the parent trend any trading system will fail as soon as the parent trend changes its direction. Changes in the parent price trend is a cause of the changes the price behaviour in lower timeframes. As an example, here are a few points that show direct relation between time-frame you trade and parent time-frames.

• If a price trend on the higher time-frame chart could be defined as up-trend then on a lower time-frame (time-frame you trade)
  • a stronger "Sell" signal is required to open "Short" trade while weaker "Buy" signal could be more profitable;
  •  some "Sell" signals could be ignored (fake signals) while majority of "Buy" signals would be profitable.
• If a price trend on the higher timeframe chart could be defined as down-trend then on a lower time-frame (time-frame you trade)
  • a stronger "Buy" signal is required to open "Long" trade while weaker "Sell" signal could be more profitable;
  •  some "Buy" signals could be ignored (fake signals) while majority of "Sell" signals would be profitable.

There could be brought many other signals and price behaviour characteristics that depends on the parent trend, yet, points already mentioned above give strong advantage in adjusting a trading system to a parent trend. For instance a trader may chose to trade only "Buy" signals during the parent up-trend and to trade only "sell" signals when the parent trend could be defined as down-trend. The S&P 500 chart below demonstrates this principle.

Chart #1: the S&P 500 60-day chart with two moving average
which define the parent trend as an Up-Trend

The 60-day (1 bar = 1 hour) S&P 500 chart (chart #1) above defines parent trend for trading the trading 5-day (1 bar = 5 min) S&P 500 chart below (chart #2). One of the simplest way to define the parent trend is using two simple or exponential moving averages. On the chart #1, fast exponential moving average is moving above slow exponential MA, furthermore, the parent trend on this chart is defined as Up-Trend.

On the chart #2 (see S&P 500 chart below) simple trading system of using SBV Oscillator is modified to react only on "Buy" signals and use "Sell" signal to go in "Cash" by simply closing long position without initiating a short trade. This trading strategy is known in technical analysis as "Trading along the trend" or as "Do not trade against the trend". The basic rule of this strategy is to trade only those signals which support the parent trend. Since in the period from November 4 until November 18 parent trend is defined on 60-day chart (chart #1 above) as an Up-trend, only "Buy" signals are traded on the 5-day (November 6-10) chart below and all "sell" signals are ignored and are used to go in "Cash".

Chart #2: the S&P 500 5-day chart with "Buy" signals only
to trade along the parent trend defined by the S&P 500 60-day chart

As you may see the knowledge of parent trend may help to adjust trading accordingly to the parent trend. While some small signals could be missed, the majority of profitable trades will be caught and majority of fake signals will be avoid. The principle of "trading along the trend" is usually used in the options trading when a trader prefers to avoid a risk involved with trading against a general market trend and prefer having fewer but more conservative trades.

NEXT: Concurent Volume

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