by Rick Ratchford
Most traders that I talk to, when asked, tell me that they always consider first, and predominately use Daily price charts. Maybe out of habit, or because most of us end up trading at that time level that this has become the case for most. But is putting so much emphasis on Daily charts (or Intraday) as opposed to the higher time frames (i.e. Weekly, Monthly) the best approach for traders who are not in and out of the markets each day?
Experience has taught me that you can find out more about the character of a market, and its likely direction for the short-term, by studying the Weekly price chart rather than any other time frame. Simple indicators, such as the Stochastic, are much more accurate in providing oversold/overbought signals as opposed to the lower time frame charts. Considering the Stochastic indicator, for example, we can see on the Daily chart that it often gets pegged either at the overbought or oversold extremes for lengthy periods of time. On the Weekly chart, however, these rarely occur in comparison.
The Stochastic indicator is just one obvious indication of the benefits of spending more time viewing Weekly price charts over that of the lower time frames. Market cycles are much more predictable on the higher time frame charts as opposed to the Daily or Intraday charts.
Because most traders focus on the Daily or Intraday charts by a much larger margin than the Weekly or higher time frames, you can see this in the more erratic pattern formations found in these lower time frame charts as traders place their buy and sell orders to make market. For the remainder of this article I'm only going to make reference to the Daily chart (low time frame) and Weekly chart (higher time frame).
The Weekly chart is a much more concentrated look of mass psychology as opposed to the Daily chart. For the sake of example only, say each day brings 100,000 traders to the market and each only makes one trading act per day. That would mean that each price Daily price bar represents the mass psychology of 100,000 minds making 100,000 market actions. In contrast, a single Weekly price bar then would represent 500,000 minds making 500,000 market actions.
Now, if you consider that 1 inch of a price chart may hold about 10 price bars, that 1 inch of market patterns is representing 1,000,000 minds and market actions for the Daily price pattern, but 5,000,000 for the same amount of space on the Weekly chart. When you consider the word 'Mass', which has more of it? The Weekly chart of course!
Therefore, you get a much clearer view of where all these minds, when grouped together (i.e. individual traders, commercial traders, Fund traders, etc.), are headed overall. One day the bears can overpower the bulls. The next day the bulls can overpower the bears. But on the Weekly chart, you can see the overall result much more clearly than on the Daily chart. You can also with higher probability determine which way the market is likely to go for the short to intermediate term.
Anytime I sit down to analyze the Futures and Commodities markets, the first chart I always look at first is the Weekly chart. It just does not make any sense to me to look at a Daily chart without having some clue as to the likely direction the market is going so as to affect my bias on the Daily chart. Once it is clear to me that the 'masses' are pushing ahead bullish or bearish, I can then look at the Daily chart and make my trading plans in tune with the direction the market power is headed.
This is not the first article I've written on the subject of focusing more on the Weekly chart. That should indicate to my readers how serious I am about the role Weekly charts plays in my analysis and how much I believe it will help improve the analysis of others as well.
If you find yourself spending more time using the Daily charts to analyze the markets for trading, and you are not daytrading, I encourage you to consider seeing the bigger and more accurate picture of market direction.