The most often asked question I get regarding the broad stock market action or the action of a particular stock is, “What’s the trend now?” The answer is always, “That depends… what’s your time frame?”
It will be helpful if we’re all on the same page as to what is a trend. An uptrend is defined as price action giving us higher highs and higher lows, over our time frame; a downtrend is defined as price action giving us lower highs and lower lows over our time frame.
A time frame may be over a period of years, weeks, days, hours, or minutes. Take your pick, but do so with a plan otherwise things can get confusing.
Taking your pick of a time frame is where beginners seem to have problems. A trend after all can be years long, weeks long, or many days long. It may even be minutes long. Take your pick, but the answer to the trend question is relative only to the time frame in question.
You might have noticed that even in a longer term uptrend price does not go up in a straight line. Price action tends to either saw-tooth its way or stair-step its way up to higher highs leaving higher lows in its wake in the case of an uptrend. Conversely, price action can saw-tooth or stair-step downward leaving lower highs and lower lows in its wake. This is observable in any time frame.
A day trader, the guy or gal who buys and sells a stock within one trading day, is generally only concerned with intraday price action. Thus, he or she might identify the intraday trend after the first five to fifteen minutes of the trading day and play it according to our trend definitions above. By definition, a day trader closes all positions at end of the day win, lose, or draw.
The swing trader can fall into several categories of trader types. In most readings, the definition of a swing trade states that “time” is part of the definition, as in: within one to four days or longer. Now, as Seinfeld would say, “Not that there’s anything wrong with that,” but the way I learned it, while the earth’s crust was still cooling, had nothing to do with time. A swing trade is entering a trade at a current price level hoping to ride price action, in the case of a bullish play, up to its previous high; or in the case of a bearish play, entering at its current price hoping to ride it down to its previous low. That can be done within a day, or even hours, or minutes, let alone over a matter of days. Thus, swing traders buy at support levels and sell at resistance or short at resistance and buy back at support.
Position traders, as the name implies to me, are those folks who build long-term positions in a stock. These are the people who basically have identified a long-term trend which always includes pullbacks in price action affording this trader the opportunity to “buy the dip” thereby adding to his existing position. Position traders can work their magic in as little as a week but generally over many weeks until a target is reached.
Traders can hold a trade for minutes, months, or years. If you bought a stock five years ago and sold it today, that’s a trade. You can trade your stock in any time frame you’re comfortable with.
A longer term trader may be more concerned with earnings than a day trader, but both are concerned with price direction which we know as trend.
Finally, no matter what trader style you relate to, ALL traders MUST follow a discipline that encompasses a money management plan as well as a trade plan.
Stalk your trade. Plan your trade. Trade your plan… according to your time frame.