Firstly, let’s be clear that you shouldn’t use long-term charts on their own for making any trading decisions. You can’t time your entries and exits from a trade with any precision based on long-term charts, and why would you want to anyway, when you have shorter term charts available? Long-term charts have traditionally been used to examine long-term trends which are important for the buy and hold investors; but the long-term charts are more likely to give you an indication where the price will end up when all is said and done, and that lack of time scale is of no use to a short-term trader. What you analyze in long term charts applies to long term price expectations, and not to the timescale of the trader.
Secondly, you should use long-term charts in conjunction with the shorter term when sizing up a stock or other security. Even though long-term charts are not of any use to determining when to make your trades, they can be revealing about the characteristics of the financial security. Long term charts help you with market analysis which will point you in the right direction. They cannot be used for timing decisions, but they can give you a good overall picture that you do not get from looking at daily charts alone.
You can save yourself some time if you appreciate the best way to use long-term charts in your trading. You should always start with the long-term chart, and work your way through to the shorter term appropriate for your style of trading, whether it is a daily chart or an intraday chart. The long-term chart allows you to see if the security is going to be appropriate for your trading system, and gives you the overall feeling for the financial instrument. The first chart you look at might be the monthly chart going back for ten or twenty years, and this will give you the overall perspective. You may even find that the historic charts give you an insight into the levels of support and resistance that can apply today, and you will learn more about support and resistance in a future module.
When you look at the long-term chart, you will be able to identify major trends, particular pricing levels that seem important, and any patterns that you will learn the significance of shortly. The next chart you should consider is the weekly chart, which will cover several years, and then you can look at a daily chart for perhaps six months and get a clearer picture of the security. A monthly chart can go back as much as 20 years, and a weekly chart may cover five years, time enough to form an opinion of how the security behaves, and how it got to the price that it is currently exhibiting.
Analysis of the FTSE
If you try to do this any other way, it will quickly become obvious why this is the best method. If you start with the short-term chart, then any conclusions that you come to may well have to be reconsidered as you go to the longer term. That means you will find yourself bouncing back to the short-term chart to redo your conclusions. It’s much better to start with the long range chart and work down. It is a simple idea, but one that is often overlooked by short-term traders, who will miss out on the perspective that is possible from looking at the available information.
