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How to Trade 5 Minute Charts

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5-Minute Bar Definition

The 5 minute bar illustrates the summary of a stock's activity for every 5 minute period within the trading session.  The stock market is open for 6.5 hours per day; therefore, a 5 minute chart will have 36 five minute bars printed for every full trading session.  Day traders are commonly trading 5 minute charts to identify short term trends which allows them to stay on top of their

The close on the 5-minute bar gives insight into the immediate market direction of trend for a stock.  When a stock closes at the low or high of the 5-minute bar, there is often a short-term breather where the stock will go in the opposite direction.  The psychology behind this is that the stock has been pushed to an extreme as other active traders chase the price trend.  This breather can mark a major reversal, but in the majority of cases, it creates the environment for a .25% - .5% counter move.

So, how exactly do you trade 5 Minute Charts

I have not performed any exhaustive scientific study as I am a trader, but I would dare to say the 5-minute chart is the most popular timeframe for day traders.

5-minutes provides you the right mix of monitoring the details, without scalping, and conversely allowing you to avoid waiting 60-minutes to pull the trigger as well.

It's that fine wine where call it the universe, or just human psychology, most traders feel comfortable within this time unit of measure.

In this article, I will cover a number of general topics and strategies that you can use to help you when trading on a 5-minute timeframe.

By the shear definition of a 5-minute timeframe, the strategies and topics covered in this article will focus on the art of day trading.

#1 - Morning Reversal

In the morning stocks will trend hard for the first 20-30 minutes into the 10am reversal time zone.  Day traders that are looking to go opposite to the trend can wait for a close at the high or low of the 5 minute bar to go opposite to the morning move.

Close at the Low of the 5-Minute Bar

Below is a charting example of NUE from 8/1/2008, where the stock had three black crows and then closed at the low of the bar.  This exhaustive move to the downside led to a 3% counter move in 30 minutes.

5 Minute Bar Close

Close at the High of the 5-Minute Bar

The below chart is from a morning reversal for the stock AUY, where the stock closed at the high of its bar and then had a sharp reversal.

5 Minute Bar Bull

#2 - Fibonacci Retracement Level Resistance

The below charting example is from 8/1/2008 where the stock UNH closed at the high of the bar at the 38.2% retracement.  This caused a reversal back down to the morning lows.

5 Minute Bar Resistance

#3 - How to Enter and Exit Trades on a 5-Minute Chart with Oscillators and Fast Lines

Oscillators do just that, they oscillate between high and low extremes.

Yet, oscillators give many fake signals. Since they are leading indicators, they point out that a trend might emerge.

Thus, oscillators are one of the most attractive tools for day traders as timing is of the essence.

Nevertheless, if not used properly, they often lead to failure. Therefore, I recommend combining two oscillators when trading on a 5-minute timeframe in order to validate trade signals.

Personally, I like oscillators only for trade entry and not trade management.

Therefore, I recommend you include a fast line on your chart in order to attain exit points on 5-minute stock charts. Some of these lines could be a regular Moving Average, DEMA, TEMA, Hull MA, Least Squares MA, Arnaud Legoux MA, etc.

In this section we will cover 3 simple strategies you can use with 5-minute charts.

Strategy #1 - Stochastic Oscillator + RSI + Triple EMA

This simple strategy uses a three-pronged approach across two oscillators and an on-chart moving average indicator.

Entering a Trade

Trade entry signals are generated when the stochastic oscillator and relative strength index provide confirming signals.

Trade Exit

You should exit the trade once the price closes beyond the TEMA in the opposite direction of the primary trend.

There are many cases when candles are move partially beyond the TEMA line. We disregard such exit points and we exit the market when the price fully breaks the TEMA. Have a look at the example below:

5-minute chart with oscillators

5-minute chart with oscillators

This is the 5-minute chart of General Motors for Sep 9 – 10, 2015. The two instruments at the bottom of the chart are the Stochastic Oscillator and the RSI. The TEMA is the green curved line on the chart. The green pairs of circles are the moments, when we get both entry signals.

First, we spot overbought signals from the RSI and the stochastic and we enter the trade when the stochastic lines have a bearish crossover. We go short and we follow the bearish activity for 15 full periods, which is relatively a long period of time for a day trader. Good for us!

We exit the trade once the price closes above the TEMA. This short position generated a profit of $0.43 (43 cents) per share, which is a decent amount even for advanced trading strategies.

Later, we receive a few more overbought/oversold signals from the stochastic, but they are not confirmed by the RSI. Thus, we stay out of the market until the next RSI signal.

Our second trade comes when the RSI enters the oversold area just for a moment. This long signal is confirmed by the stochastic, so we go long. The bullish move that ensued is minor, but still in our favor!

We hold this trade for 9 periods before closing the position. We exit the market when a bigger bearish candle closes below the TEMA with its full body. This long trade brought us a profit of $0.09 (9 cents) per share.

On the next day, we manage to identify another long signal from the stochastic and the RSI.

We hold the long position open for 14 periods before one of the bearish candles on the way up close below the TEMA. This long position generated a profit of $0.46 (46 cents) per share.

The overall results from this strategy are:

  • 3 Positions
  • 2 long
  • 1 short
  • Time in the market: 3 hours and 10 minutes
  • Total profit: $0.98 (98 cents) per share

Strategy #2 - MACD + MFI

For this next strategy, we will combine the Moving Average Convergence Divergence with the Money Flow Index. We will enter the market when we receive confirming signals of the MACD and the MFI.

However, for how long will we hold the trades?

Notice that in this stock trading setup we have no on-chart trading indicator for identifying exit points.

The reason for this is that the MACD does a pretty good job of this itself.  We will simply exit the market whenever the MACD has a crossover in the opposite direction!

Notice that when using the MACD for exit points, you stay in the market for a longer period of time.

5-minute chart + MACD + MFI

5-minute chart + MACD + MFI

This is the 5-minute chart of McDonalds for Sep 30, 2015. The two instruments at the bottom of the chart are the MACD and the Money Flow Index. The green circles indicate the entry signals we receive from the two indicators. The red circles indicate the moment when the MACD tells us to get out of the market. Notice that in this example, the exit point of a position is the entry point of the next one. Thus, the red and the green circles match in three cases.

In the first case, we have matching bearish entry signals from the MFI and the MACD. This is what we are waiting for and we short McDonalds. Although there is strong hesitation in the price movement, no exit signal is provided from the MACD and we hold our position. Later on, the price moves in our favor and we close the trade when the MACD has a bullish crossover. We were short for 34 periods and generate a profit of $0.33 (33 cents).

That’s not very persuasive, uh. Let’s go through the next case.

As we said, in this strategy example, we often open a contrary position right after closing the trade. Therefore, once we received the exit crossover from the MACD, the MFI gave us a long signal.

We stay in the market for 36 periods until the MACD gives us a bearish crossover. We collect a profit of $0.56 (56 cents) per share from this trade – slightly better than the previous example.

The MFI is already high and we immediately open a short position after the MACD crossover from the previous position. McDonalds starts to move in our favor, but the direction changes rapidly. Yet, the two lines of the MACD interact, but they do not create a crossover. Thus, we hold our short position for 39 periods. In this trade, we accumulated a profit of $0.81 (81 cents) per share – much better!

With the exit of the previous position came the entry point for the next trade. This is so, because the MFI was already down when the MACD exit crossover appeared. Thus, we go long and we enter the best trade of the four cases! We hold McDonalds for 27 periods before the MACD gives us a bearish crossover. This long position generated a profit of $0.88 (88 cents) per share. Well, that my friend is a good trade!

The overall results from this strategy are:

  • 4 Positions
  • 2 long
  • 2 short
  • Time in the market: 11 hours and 20 minutes
  • Total profit: $2.58 per share

Strategy #3 - Klinger Oscillator + RVI + 12-Period Least Squares MA

This 5-minute chart strategy involves the Klinger Oscillator and the Relative Vigor index for setting entry points. We try to match long and short signals with the two oscillators, which will be an indication to trade the equity. When we get these two signals, we open a position and we hold it until we see a candle closing beyond the 12-period LSMA.

5-minute chart + KO + RVI + LSMA

5-minute chart + KO + RVI + LSMA

This is the 5-minute chart of Yahoo for Dec 8, 2015. The two instruments at the bottom are the RVA and the Klinger. The blue curved line on the chart is the 12-period LSMA. On this chart, we have four trades. The green circles show the four pairs of signals we get from the RVA and the Klinger.

First, we get a bullish signal from the Klinger, which is confirmed by the RVA after 4 periods. When we get the confirmation, we go long. We manage to hold the trade for four candles before we see a bearish candle below the LSMA. We get $0.10 (10 cents) per share from this trade.

Four periods later, the Klinger and the RVA give us bearish signals at once and we go short. We get a slight bearish move of four periods before a candle closes below the LSMA. We generate $0.12 (12 cents) per share more.

The third trade is the most successful one. Six periods after the previous position, we get matching bullish signal from the Klinger and the RVA. Thus, we go long with Yahoo. We manage to stay for 9 periods in this trade before a candle closes with its full body below the 12-period LSMA. Notice that at the end of the bullish move, there is another bearish candle, which closes below the LSMA, but not with its full body. Therefore, we disregard it as an exit signal. This long position brings us a profit of $0.37 (37 cents) per share.

With the next candle, we get bearish signals from the RVA and the Klinger and we go short with the closing of the previous long position. We get out of this trade after 5 periods when a bigger bullish candle closes above the LSMA. This trade generated profit of only $0.03 (3 cents) per share.

The overall results from this strategy are:

  • 4 Positions
  • 2 long
  • 2 short
  • Time in the market: 2 hours and 10 minutes
  • Total profit: $0.62 (62 cents) per share

Which 5 minute bar trading setup is better?

The trading strategy I prefer when trading 5-minute charts is the MACD + MFI. The reason for this is that this strategy distributes the trading along the entire trading day. In the example above, we covered the whole day with only 4 trades. Furthermore, we generated an impressive amount per share! In the other two strategies, the amount of trades per day will be significantly more. As you see with MACD + MFI we traded 4 positions for 11 hours, while with Klinger, RVI and LSMA, we traded 4 positions for only 2 hours.

Yet, some of you will like fast paced trading and will like to exit the market more frequently.  Just remember in trading, more effort does not equal more money.

Summary

Even if you are not trading 5 minute charts, it is essential that you keep an eye on them.  The majority of day traders are using 5 minute bars to make their trading decisions.  Therefore, these traders tend to control the action.  If you are a trading with the 15 minute charts, be mindful that a sharp countertrend move can occur at the close of a 5 minute bar.

Remember, a close at the high or low of a 5-minute bar is a potential indication that a minor reversal is in play.  Day traders should not immediately exit their winning position, but should rather look at this as a sign of a potential trend change.

Alton Hill

Alton Hill

I am the co-founder of Tradingsim.com and an IT professional that specializes in large scale Systems Integration projects. I have actively traded the markets since 2000 and believe that true trading mastery comes from practice. When I'm not working on a new trading strategy, I enjoy spending time with my wife and kids.
Alton Hill
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