which time frame best suits that market. Some people like to look at different
time period charts depending on the market they trade. With a thin
stock, a one- or five-minute chart may look spotty, while in IBM you can
comfortably get good entry and exit spots using a one-minute chart. Compare
a one-minute chart (Figure 6.4) of AKF and IBM to see the difference.
There is no way you could make a reasonably smart trade based on a oneminute
chart of AKF but you could from the IBM chart.
If you are trading the thin AKF then you’ll need to up the time frame to
maybe 10 minutes or 30 minutes to get a decent picture that may actually
tell you something. That means you may have to have a longer hold period
for that stock than you would for one where you can more easily get in and
out of a trade. I’ve added a 30-minute chart of AKF in Figure 6.5 and even
here it is a little spotty, but at least you can see some resemblance to a real
chart in it and you could use it to get into and out of the stock. I would only
trade this kind of stock if I was planning on holding it for quite a while, like
weeks or years. I have bought a few of them over the years, and they were
always long-term plays.
FIGURE 6.4 1-Minute AKF vs. IBM
Source: © TradeStation Technologies 1999. All rights reserved
FIGURE 6.5 30-Minute AKF
Source: © TradeStation Technologies 1999. All rights reserved.
While we are on the subject of charting, I want to bring up how I look
at charts when I’m trading the index futures, as it will apply throughout the
rest of the book.
As you know, I like to look at different time frames when I trade. The
problem when trading a futures contract like the Dow Jones or S&P is that
the longer term chart you look at, the smaller amount of good data you
get. As you can see in Figure 6.6, there are only a few months worth of data
that are reasonable to look at; the rest are just useless dots. This is because
the futures do not trade very much at all when they are back months and
are only shown as the settlement price. This limited charting makes it very
hard to plot indicators and get a full idea of what is going on. I’ve included
the 50- and 200-day moving averages in Figure 6.6, but you can see they
are only useful in the last couple of months because before December they
factor in 0 as data points. You can also see there is really nothing to grasp
at if you were trying to plot a long-term trend line.
Now if you look at the actual Dow Index (Figure 6.7) you will see
a much nicer, fuller chart on which you can draw your trend lines, have
proper long-term moving averages, and make your trading decisions from.
If I were to condense this chart you could even see five years of solid data
on the screen to give you a longer term picture, with the futures contract
FIGURE 6.6 Daily Dow Mini Futures
Source: © TradeStation Technologies 1999. All rights reserved.
FIGURE 6.7 Daily Dow Index
Source: © TradeStation Technologies 1999. All rights reserved.
what you saw above is all you get. You can, however, get a fuller picture
with futures using continuous charts. There are people who like to stay
true to the futures and will use a continuous futures chart to get their information.
Continuous charts are where the front month of the futures contract
gets charted and the contracts get rolled over as they expire to make one
smooth flowing long-term chart. There are two common ways to do this,
but both have problems associated with them. Usually there is some spread
in the price of contracts between the expiring and new front month. For
example, when the December Dow contract expires it can be trading at
13,526 and the March contract, which is the next month, will be trading a
little at 13,592, due to the time value, interest rates, and traders’ expectations.
When you try to combine two contracts on a chart, you can do so by
using the real prices, which will result in a gap appearing on the chart at the
time of rollover. But this will mess up your technical analysis, as old trend
lines, supports, resistance levels, and so forth will be not be helpful anymore,
and new ones will have to be redrawn with each new contract. Yet it
may not be easy to properly redraw them as data has just changed and levels
move as a result of when a new contract becomes the front month and
has a 70-point gap from the old one. The change in the data may lead you to
believe that a market has broken a support level when in reality it did not.
The other way you can chart continuous data is without gaps. You just
plot the new contract at the point where the other left off and then adjust
the price of back months to coincide with the current front month. The
December contract now looks like it was trading 13,590 when it rolled over
and not 13,526 as it actually did. The problem with this method is you can
sometimes get very strange pricing as you go back in time. It is not uncommon
to see markets with negative values if the data gaps are large enough
between front and back months.
The problem with both methods is that you lose some accuracy when
making the adjustments. If you compare the charts in Figure 6.7 (the actual
Dow index) with that of Figure 6.8, which is a back adjusted continuous
futures chart, you’ll see how some of the technical points have changed.
For example, point A in Figure 6.8 is only a few points lower than
the previous low made about two weeks prior. In Figure 6.7 it’s quite a
bit lower, which in this case may have given you a signal to short or a
stop that Figure 6.8 wouldn’t have, albeit a signal you probably wouldn’t
have wanted anyway. But in another example, the low made by point C in
Figure 6.8 is below the low made at point B, however in Figure 6.7 it is
above point B. Though it may not have indicated a trading signal on the
chart in Figure 6.7, it would have in Figure 6.8. Nevertheless, you can see
how the two charts are a little different and how at some time or other you
may make a trade based on one chart that you wouldn’t have made using
FIGURE 6.8 Continuous Dow Mini Chart
Source: © TradeStation Technologies 1999. All rights reserved.
another. Because the futures market can be a little more erratic, I prefer to
just base my decisions on the actual indices in order to get a truer picture.
Once I have that picture, then I make my trades with help of the smaller
time framed futures charts.
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