What I’ve used for demonstration above and later in this guide are daily charts, as these are the most commonly used and are ideal for someone who may sit down every night to review their trading positions. This is typical for short-term or swing trading. Obviously, if you are day trading, spread betting continually through the day, these are only useful for general background and provide no indication of what trades to make when. For that, you need to look at charts where the timeframe is in minutes, and which have live updates.
The great thing about technical analysis is that the timescale that you are looking at doesn’t really matter, the same principles apply. Whatever charting software you use, whether it is from your bookmaker, or a free or paid service, you will find that you can set the timescale to what you want, within reason. Each candlestick can be 5 min., or an hour, or day, week, or month. The chart will look different, obviously, but you will still recognize patterns that you have learnt on the daily chart.
Even if you are trading off the daily chart, I highly recommend that you look at other time frames for the same security. You need to see how the daily fluctuations are fitting into the overall picture of how the Security is trading, otherwise you are depriving yourself of information which may be important. If you trade off the daily chart, you may want to look at weekly and monthly charts too. You may be surprised how much you can learn from looking at the previous history. As I’ll explain later, you can also determine certain critical levels of price from the past, even going back some years.
You will recall that I spoke about using a laptop computer and this is one of the places where it is really valuable. The additional monitor which you can easily hook up can show you the chart for one time scale, while your main screen shows your trading chart, and that is much easier than trying to squint at several charts on the same screen.
You may be surprised to see just how differently a stock behaves when you look at different time scales. For instance, the daily chart made show a strong uptrend, while a weekly chart can show that the stock has been in a decline for years, and that the daily chart is simply a retracement, possibly before a continuation of the downtrend. Even if the longer-term chart reinforces what you see in the daily chart, it is still worth reviewing for that very reason.
So you should be looking at several different time scales for the financial instrument that you are considering betting on. If you are a frequent bettor, you might find that you don’t need to look up the longer-term charts every time, but it’s best to have them at hand. You shouldn’t try to trade off the long-term charts, as they can’t give you the best moment to enter the bet.
The ideal way to evaluate the bet is to look at the long-term chart as soon as you consider that you want to bet on the security. You can then review a medium-term chart before settling on the short term that will give you your entry timing. If you try to do it any other way, then there may be a lot of to-ing and fro-ing between the charts. Any decisions you make when you look at the short-term chart may be countered by the information you get from reviewing the longer-term charts, and you’d have to start over again. If you start with the long-term chart and work down then you already have the overall picture by the time you’re reviewing the short term possibilities.
Now back to the question of price scales. When you are looking at a long-term chart, one that covers several years, you will see the effects of inflation. You may wonder if inflation matters, and whether you should somehow adjust the prices to see what “really” is happening to the stock value. After all, at 7% inflation per year the price of everything practically doubles every 10 years. The stock price doubling does not mean that it is “worth” twice as much intrinsically, does it?
Well, the answer is yes and no. This is a point that can be debated, but generally it’s considered you do not have to make any allowance for inflation. Inflation is built into the markets. If the pound becomes worth less, then the price of everything will seem to rise. You’re concerned with what the current price is when you are trading, so inflation is irrelevant. After all, one of the basic principles of technical analysis is that market action discounts everything. Inflation is one of those things that is discounted, and it makes no sense to single it out for special treatment. Something like changing foreign-exchange rates for a manufacturer who relies on exports or imports could equally well be considered a factor you can adjust for, and we don’t do that.
If you’re concerned about the effects of inflation and their visual effect on the charts, then the best answer is to consider a logarithmic price scale, as mentioned above. In this way, if there’s a 10% rise this year or 20 years ago, it will still look the same on the chart. With the other type of scale, the arithmetic scale, you might not even notice the increase 20 years ago because it would be a much smaller number. It sometimes depends on what you’re looking for, and there is no hard and fast rule, so feel free to experiment with both scales and find what you are comfortable with.