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Charted Territory: Does Anybody Really Know What Time It Is?

Does anybody even care? You should. Time frame can mark the difference between a good trade and a bad trade.

It's Monday afternoon as I write this, and it's the first time I've had the opportunity to check my email in a few days. Combing through the hundreds of letters, I was struck by a common theme. And that theme was, "I saw your write-up of XYZ, and you were wrong! It's going up instead of down!" (Note: Like all thin-skinned writers, I always -- wrongly, by the way -- focus on the negative rather than the positive. In fact, the overwhelming majority of the email I receive is extremely complimentary. But who really wants to hear about my fan mail?)

Now, let's face facts. Undeniably I am wrong a lot. And if you disagree with my analysis, then so be it. In fact, if you feel strongly enough, then your best bet is to take the opposite side. Truthfully, you won't hurt my feelings a bit.

No, the naysaying doesn't bother me. Even calling me a moron doesn't bother me. What bothers me is that rarely do people ever ask what time frame I'm trading in. And, folks, time frame is critical.

Let me give you an analogy, this time from golf, for all you swimming-weary readers. When I watch golf on TV, and the commentator says, "Johnny, this putt will break six inches to the left," I want to scream. Why? Because that six-inch break is totally dependent on the speed of the putt. I mean if the golfer putted the ball at 100 mph, it wouldn't break at all. If he just nudged it, it might break 10 inches. Now, implied of course, is that the putt will break six inches,

if it's hit just hard enough to stop at the hole

. But that's an assumption that may not be accurate. In fact, most great putters hit the putt hard enough so that if they miss, it will go maybe a foot or so

past

the hole!

So assumptions about speed are quite often the difference between a made and missed putt. Similarly, assumptions about time frame are often the difference between a winning and losing trade.

Think about chart commentary, mine or someone else's. "This stock will go up." Great, but over what horizon? Today? By next week? Over the course of the next year? It all depends on your time frame!

Let me give you an example of a stock that, depending on how you look at it, is either bearish or bullish. That stock is

Amazon.com

(AMZN) - Get Amazon.com, Inc. Report

, and it has something for everyone.

Now, what applicability might all this have to your trading? So often we look at day-to-day prices and forget what time frame we're trading in or what time frame the analysis assumed. And it screws us up.

As an illustration, let's look at

CMGI

(CMGI)

TheStreet Recommends

, a stock I am short in the

TF II contest. This was one, of course, that drew many heated responses from the CMGIdiots (I stole that from

Herb G.

Actually, the CMGI lovers are not idiots. They're some sort of evil cult!). They think I'm just nuts to be short this stock. They go blathering on about how great and wonderful, and blah blah blah the company is. And, of course, how stupid I am. And then they point to the chart of the past few days and laugh at me!

I mean, how dumb of me to be short a stock that

only goes up

! Well, maybe, but here's the chart I'm focusing on:

Now, for all I know, CMGI will keep going up, cross the 50-day moving average and stop me out. Fine, that's trading. However, the important point for me to remember is not the day-to-day action of CMGI, but rather what time frame I'm trading in. For this stock and the contest, it's certainly something longer than three days. Therefore, all my decisions, trendlines, etc. have to be based on a longer term, and I have to keep reminding myself that CMGI is still in a down trend, and I'll stay short until proven wrong.

An example of someone who's a master -- perhaps the master -- at remembering his time frame is

Warren Buffett

. I am certain he is not bothered by day-to-day fluctuations. Probably not even week to week or month to month. No, he remembers that he's long term, and doesn't seem to let anything interfere with his thought process.

We've all heard the tired old saw that the trend is your friend. Right and good, but the key is knowing which trend and sticking to it. If you're a day trader who's short

America Online

(AOL)

and it's dropping by the second, what do you care if the long-term trend is up, up, up? On the flip side, if your time horizon is measured by tree rings, then why be concerned if AOL drops 10 or 20 points in a day?

So remember that when some technician, scribe, hedge fund manager or other know-nothing loves or hates your favorite stock, his or her thinking may be totally inconsequential to you. What you should focus on is entering the trade thinking one time frame and sticking to that time frame throughout the trade. Switching time frames mid-trade is what always kills you. And probably causes you to send me those nasty emails!

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At the time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Smith writes five technical analysis columns for TheStreet.com each week, including Technician's Take, Charted Territory and TSC Technical Forum. While he cannot provide investment advice or recommendations, he welcomes your feedback at

gbsmith@ibm.net.