Most traditional methods of technical analysis, in particular trend-following systems, are not used for trading intervals of less than 3 days; however, the price fluctuations during these shorter periods are nearly all technical. An economic analysis of supply and demand cannot be relevant over such a short time span; that approach can only be used for establishing longer-term trading policy. Other than the immediate reactions to overnight cash market movement, anticipated daily price changes based on political events and weather have not been successfully measured, however, techniques used for day trading can be applied to slightly longer periods of a few days. The principles used in these time frames are very different, and the number of data points used in the calculations reflect on the final reliability. For example, a 3-day daily moving average relies on only three data points for its decision of the direction of the trend; therefore, it will be very erratic.
Both day trading and short-term trading are concerned with timing to improve entry and exit points. The most common way to accomplish this is by a simple form of pattern recognition based on values relevant to the short time frame. From the floor trader’s viewpoint, only the most obvious recent key levels are important. Today’s price movements are compared with today’s opening price, high and low, yesterday’s closing price, yesterday’s high and low, last week’s high and low, very memorable older support and resistance points, and finally, life-of-contract high and low. When the same price satisfies more than one condition, there is greater confidence in the importance of that point.
The importance of noise is also very different for the day trader and the trend follower. Noise, the underlying erratic movement of prices, is not a significant issue for the position trader looking to follow interest rates to high levels over the next year. But it is very important for the day trader, because the trend component of price movement is very small over a 24-hour period compared with the noise. This makes it impossible, using the ordinary trend-following tools, to decide whether a move up over 15 minutes will begin a trend or whether it is simply part of the more common market noise.