Ask Colin

What benefits and/or advantages are gained by reviewing the weekly bar chart instead of, or in addition to, the daily bar chart for a stock?

This is one of the often-asked questions I receive. However, let's look at it again.

One of the most important and difficult decisions an investor or trader has to make before he or she starts is the time frame in which they plan to trade or invest. You would then make your buying or selling decisions from the chart that is relevant to your time frame. Perhaps the single fastest way to lose money is to invest on a time frame that demands a weekly chart and then sell based on something that happens in the short term on the daily chart.

 

However, it is not a simple as this. There is something even more important to know and use in your analysis. This is that what happens in any time frame may be influenced most strongly by something that is happening in a longer time frame. So, let's suppose you are investing off a weekly chart. You find a nice upward breakout and buy it. Then it fails on you. This may often be just part of the game. However, it may also be that you have bought an upward breakout in a longer term down trend and as soon as the rise got near the long term trend line, it failed.

 

The lesson is that you should begin your analysis of any market or share from the long term monthly chart with as much history as you can get – ten years or more if possible. You should be looking for good charts in the long time frame. Then you work your way down to the time frame you intend to trade or invest in where you will make your tactical entry decisions. Ideally, even a short term trader should be looking for an uptrend on the monthly chart, the weekly chart and then buy an upward breakout or similar signal on a daily chart.

 

As an investor, rather than a trader, I start with a monthly chart with 20 years of price history. Then a weekly chart with about five years of history. I decide what shares to buy off the monthly and weekly charts. Likewise the selling decision is made off the monthly and weekly charts.

 

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