Although many stock traders base their trading decisions upon daily charts, there’s no law requiring it. For day traders, trading from a daily chart is downright silly, and durations of two minutes, five minutes, or thirty minutes are more appropriate. Like other securities traders, stock traders should feel free to experiment and find the chart time interval that works for their trading style.

The most important element, when determining which time interval is most suitable, is personal preference. However, a close second is the stock’s liquidity, or the number of shares being offered or purchased at any given time. Stocks with high liquidity have subsequently higher volume, meaning that more shares change hand on a given day than stocks with low liquidity and volume.

The general rule is:
•    Stocks with higher liquidity can support shorter duration charts; but
•    Stocks with lower liquidity cannot.

As an experiment, pick a stock and shorten the duration of the chart. As long as the chart looks relatively “normal,” with candlesticks or price bars forming clear movements, the stock has sufficient liquidity to support that duration. But when the chart begins to resemble computer art, interspersed with much gapping, then the duration is too short for the stock’s liquidity.

Below is the two-minute chart for Billabong International (BBG):

Although the trends can be followed, the candlestick signals are lost and gaps are not uncommon. Also, the volume can barely be seen, along the bottom of the lower window. BBG is simply not sufficiently liquid to support the two-minute chart.

Below is the same chart at a five-minute interval:

This seems much more the thing. BBG has sufficient liquidity to support this chart, and therefore commands sufficient volume to trade at a five-minute duration.

Remember, liquidity may seem a trivial consideration when the stock price is moving in the desired direction. But in case the trade goes south, the trader should ensure there will be a buyer (or seller, if short selling) to take the shares off his hands.

When last analysed, BBG had entered a trading range between support at 10.00 and resistance at 12.00, but had closed beneath that level. With no change in volume, the stock rolled lower as expected to 9.25, as shown on the analysed chart, below:

After touching and respecting the support at 9.25 for much of the month, on 22 June BBG burst beneath that level and continued to fall. Again, there has been no significant shift in volume to indicate a change in the stock’s current trend. Once the stock has closed beneath minor support at 8.75, traders should watch the approach to the next major support level, at 8.00.

technical analysis by Craig Liles

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