Part of trading is being able to see the 'Forest through the trees', meaning, understanding what the larger time frames are saying. One of the items we hear new traders talk about is what time frame to trade on and while there is no one answer for this there is a set of rules that we can apply. Most of the time when we hear traders say they trade off a 5, 15 or even 30 minute time-frame, we can almost assume if they are profitable or not, and on those time frames the result is usually no.
A simple way to look at this concept is to look at a price chart and determine whether or not the chart is overbought (retail pricing) or oversold (wholesale pricing - think Black Friday Sales). We are able to see this on the larger, macro time-frames: monthly, weekly, daily. This is seeing the forest through the trees, aka, the 60 min and smaller entry based time frames. This is typically where many traders become confused when trying to determine the 'trend' of the security they are trading and seeing the macro time frame allows us to determine the overall picture. Trends start and end at macro pivot points (resistance/support) so let's look into this concept a bit more.
Weekly Time-Frame View
So what we have above would be considered a Macro chart, or a weekly, 3-year time frame. This shows us past price and an area where we can see a potential larger, turning point in trend. Where the yellow circle is we saw a large trend change occur: From $55 to $32 a share so when that trend started we had an idea of what was going on 'above us'. So at current time we could see the same thing. Should we see a trend change from $55 again as we then go to lower time-frames like the 60 min or 4 hour we then know that the 'wind is against are backs' as we are trading with the new trend lower. This concept, multiple time-frame trading is essential in trading success and something we focus on heavily in Core Foundations of Trading (C.F.O.T).
60 Minute Time-Frame View
Since we now are aware of what the forest looks like from the weekly we are prepared to venture through the trees, the 60 minute time-frame. We saw an initial seller at $56 then as we are now in the zone we are watching for another seller to appear. Where this become really great is when we get correlation between multiple time-frames. If we also had a 60 min resistance set-up then we would call that confluence and it would provide us with a stronger sell-signal. While confluence is not necessary for us to enter a trade it certainly provides us with a lower-risk entry.
As for a potential trade using multiple time-frame analysis we can then learn how to begin to structure it for maximum gains with minimal risk. If one understands that a trend change is set to occur and if that trend change could last for a duration of say, 2-3 months, the trade structure becomes much more quantified. So when you begin your analysis ensure that before you enter the forest that you see the entire forest, once that is done, you can continue on your trek through the trees and hopefully to profits.
I hope this was of help. You can learn more about the markets by attending a Trading 101 Workshop online or in a city near you here.