Lesson How the 30min Chart Helps Intraday Trading 5min

Nov 17, 2010: 11:32 PM CST

While today’s intraday trading session didn’t offer stellar opportunities in the low-volatility session, those who were watching the 30min SPY chart in conjunction with the 5-min or 1-min SPY charts had a distinct information advantage today.

Let’s take a look at why that was so and learn a lesson in how to trade lower frames using higher timeframes as a reference.

Keep in mind that while this discussion is focused on the SPY as the reference, the same lesson is true in the @ES futures or in related stocks with similar patterns.

Keeping the lesson as simple as possible (as in, no discussion of other indicators), let’s focus on price and the 20 period Exponential Moving Average (an average – along with the 50 EMA – I use on all my charts).

The basic lesson is that in the context of a downtrend, price often retraces up to the 20 or 50 EMAs and then turns back down to form a new swing leg lower which is a tradeable opportunity (place the stop just above the EMA in case it breaks).

Price can form key resistance into these EMAs, turn lower, and then fall.  While that’s great to know on a higher timeframe (the same is true for the daily chart), how might it benefit you to take this new knowledge, arm yourself with it, and then trade more efficiently on a lower timeframe?

Glad you asked!

Let’s now drop to the 5-min chart of November 17th’s session to see how to trade very short-term (scalping even) with this 30min structure in mind.

While you’d be much more specific in real-time, (as in, knowing exactly what the 20 EMA was on the 30-min chart), I’ve replicated it slightly on the 5-min chart (you can’t super-impose higher timeframe EMAs in most charting platforms – you’ll just have to keep it open on a separate chart).

That being said, keeping it simple, each time price rallied up into the 20 EMA and formed a corresponding reversal candle, it was a short-sale opportunity.

The AGGRESSIVE entry is to execute as close as possible to the price reference level you expect to hold as resistance.

The CONSERVATIVE entry is to wait for a reversal candle to form then for price to break the low of that reversal candle (in each opportunity, a reversal candle formed – mostly spinning tops).

You can also combine structure to see that the 5-min upper Bollinger Band was roughly equivalent to the 20 EMA on the 30-min chart.  That alone is a lesson in dual-timeframe confluence.

The stop goes just above the prior swing high and/or the 20 EMA resistance level (remember to give a few cents of leeway in for slight breaches that then break down).

The target is usually the lower Bollinger Band on the 5-min chart or a prior swing low on the 5-min chart.

These are very quick, active ‘scalp’ type trades that – while they don’t look like much – they were decent opportunities for quick profits on a day that really didn’t give much other opportunities.

Each was good for about 30 cents – which is about $300 on 1,000 shares, or about 3 points if you traded the same set-up in the @ES futures (which was about $150 per contract, as one contract is equal to 500 shares SPY).

Granted, it’s not much to write home about, but nothing to sneeze at either.

Take this lesson and incorporate it on future days and in individual stocks – incorporating a higher timeframe “idea” that you execute with corresponding entry signals on the lower/intraday frame.

This is the type of logic and explanations I detail to members in the “educational” section of the Idealized Trades Report each evening.

The more you see these setups and the more you learn these lessons with real-world examples, the better you’ll be able to recognize then act on real-time opportunities as they develop intraday.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

4 Comments

4 Responses to “Lesson How the 30min Chart Helps Intraday Trading 5min”

  1. Shaishen Says:

    Couldn't I use a 120 EMA on the 5 min in order to get around the not being able to super-impose higher timeframe EMAs. Just thinking a 20 EMA on 30 min should be a 120 EMA on a 5 min?
    Or am I committing a thinking error?

    Shaishen

  2. Dominick Says:

    Shaishen, I have been doing the same thing with Bollinger Bands on the 1 min. chart. If you plug in 100 instead of the default 20 period it will roughly correspond to the default 20 period on the 5 min. I simply figured why not give it a try.

  3. Brian Says:

    Can you reverse this and use the 20/50 EMA as a support in an uptrend?

  4. Client Says:

    Still I couldn't use different timeframes for the benefit. Usually the price have its own behaviour on each timeframe. Noise on a higher level may trigger stop loss on the lower timeframes…