Video- Multiple Time Frame Analysis

Maximize Profitable Trades Using Multiple Time Frames

James Chen - Multiple Time Frame Trading in the Forex Market

Summary : Multiple Time Frame Analysis

Here are a few tips you should remember:

You have to decide what the correct time frame is for YOU. This comes from trying different time frames out through different market environments, recording your results, and analyzing those results to find what works for you.

Once you've found your preferred time frame, go up to the next higher time frame. Then make a strategic decision to go long or short based on the direction of the trend. You would then return to your preferred time frame (or lower) to make tactical decisions about where to enter and exit (place stop and profit target).

Adding the dimension of time to your analysis gives you an edge over the other tunnel vision traders who only trade off on only one time frame.

Make it a habit to look at multiple time frames when trading.

Make sure you practice! You don't wanna get caught up in the heat of trading not knowing where the time frame button is! Make sure you know how to shift quickly between them. Heck, you should even practice having chart containing multiple time frames up at the same time!

Choose a set of time frames that you are going to watch, and only concentrate on those time frames. Learn all you can about how the market works during those time frames.

Don't look at too many time frames, you'll be overloaded with too much information and your brain will explode. And you'll end up with a messy desk since there will be blood splattered everywhere. Stick to two or three time frames. Any more than that is overkill.

We can't repeat this enough: Get a bird's eye view. Using multiple time frames resolves contradictions between indicators and time frames. Always begin your market analysis by stepping back from the markets and looking at the big picture.

Don’t Use Multiple Time Frame Analysis without Proper Chart Time Frame Alignment

Most traders find themselves analyzing a currency pair for trading purposes on a single time frame. While that is all well and good, a much more in depth analysis can be accomplished by consulting several time frames on the same pair. Think of it as trying to “size up” a person based on meeting them on one occasion versus meeting them several times. You will have more insight regarding both the person and the trade if you view them from more than one vantage point.

Since a currency pair is moving through multiple time frames at the same time, it is beneficial for a trader to examine several of those time frames to determine where the pair is in it “trading cycle” on each time frame. Ideally a trader will want to postpone their entry until momentum in each time frame is aligned…all bullish for an uptrend or all bearish for a downtrend.

The entire process regarding trading in general and Multiple Timeframe Analysis (MTFA) specifically begins by identifying the trend…the direction in which the market has been moving the currency pair in question over time. 

Many traders will employ some aspect of Multiple Time Frame Analysis in their trading.

A question that comes up quite frequently regarding MTFA is how far apart the time frames should be from one another. Here is an example of a question on this topic from a recent webinar: “If I use the Daily, 4 hour and 1 hour charts, could I then move down to the 5 minute chart for a scalp?”

While Multiple Time Frame Analysis can be used in a wide variety of trading strategies from shorter term to longer term, it is important to be sure that the “spacing” of the chart time frames relate to each other.

For example, while using the Daily chart to determine the trend on a pair and then executing the trade from the 4 hour or the 1 hour chart, makes sense, throwing a 5 minute chart into that mix is simply too much of a disconnect from the other time frames.

The Daily and the 4 hour frames of reference are simply too far removed from a 5 minute frame of reference. For example, there are 288 individual 5 minute time periods in a 24 hour period. So we would be looking at a day’s worth of trading data and trying to carve out 1/288th of that time period to determine our entry. The 1 hour is closer to our objective but even then some might argue that it still is a bit removed for our purposes.

Ideally you want to achieve a balance so that the time frames of the charts are neither too close nor too far apart from one another. We want them to be close enough so that one time frame does have an impact on the others being used, yet not so close that each time frame is a virtual clone of the others.

For example, a Monthly, 6 hour, 5 minute chart array would simply have too much separation and none of those time frames really have any direct impact on the other. At the opposite extreme, a 30 minute, 29 minute, 28 minute chart array would not be of any value either since each of the charts is a virtual duplicate of the other. Consequently, the whole purpose of MTFA would be lost.

What we teach is to space the time frames using roughly a 4:1 or 6:1 ratio. Notice how this Daily, 4 hour, 1 hour scenario breaks down: a 4 hour chart is 1/6th of a Daily chart and 1 hour chart is 1/4th of a 4 hour chart.

You can use any time frame you like as long as there is enough time difference between them to see a difference in their movement.

You might use:

Base            Minor                      Major

1-minute     5-minute               30-minute

5-minute     30-minute              4-hour

15-minute   1-hour                   4-hour

1-hour         4-hour                  daily

4-hour         daily                    weekly

and so on.

Multiple Time Frames Can Multiply Returns

In order to consistently make money in the markets, traders need to learn how to identify an underlying trend and trade around it accordingly. Common clichés include: "trade with the trend", "don't fight the tape" and "the trend is your friend".

Trends can be classified as primary, intermediate and short term. However, markets exist in several time frames simultaneously. As such, there can be conflicting trends within a particular currency pair depending on the time frame being considered. It is not out of the ordinary for a currency pair to be in a primary uptrend while being mired in intermediate and short-term downtrends.

Typically, beginning or novice traders lock in on a specific time frame, ignoring the more powerful primary trend. Alternately, traders may be trading the primary trend but underestimating the importance of refining their entries in an ideal short-term time frame

In the table below  we've highlighted some of the basic time frames and the differences between each.

You also have to consider the amount of capital you have to trade.

Shorter time frames allow you to make better use of margin and have tighter stop losses.

Larger time frames require bigger stops, thus a bigger account, so you can handle the market swings without facing a margin call.

The most important thing to remember is that whatever time frame you choose to trade, it should naturally fit your personality.

If you feel a little uptight like you're undies are loose or your pants are little too short, then maybe it's just not the right fit.

This is why we suggest demo trading on several time frames for a while to find your comfort zone. This will help you determine the best fit for you to make the best trading decisions you can.

When you finally decide on your preferred time frame, that's when the fun begins. This is when you start looking at multiple time frames to help you analyze the market.

Trading using multiple time frames has probably kept us out of more losing trades than any other one thing alone. It will allow you to stay in a trade longer because you're able to identify where you are relative to the big picture.

Most beginners look at only one time frame. They grab a single time frame, apply their indicators and ignore other time frames.

The problem is that a new trend, coming from another time frame, often hurts traders who don't look at the big picture.

Fibonacci Trader-Law of Multiple Time-Frame

The patterns common to time frames are easily compared with fractals; within each time frame is another time frame with very similar patterns, reacting in much the same way. You cannot have an hourly chart without a 15-minute chart, because the longer time period is composed of shorter periods; and, if the geometry holds, then characteristics that work in one time frame, such as support and resistance, should work in shorter and longer time frames. Within each time frame there are unique levels of support and resistance; when they converge, the chance of success is increased. The relationships between price levels and profit targets are woven with Fibonacci ratios and the principles of Gann.

One primary advantage of using multiple time frames is that you can see a pattern develop sooner. A trend that appears on a weekly chart could have been seen first on the daily chart. The same logic follows for other chart formations. Similarly, the application of patterns, such as support and resistance, is the same within each time frame. When a support line appears at about the same level in hourly, daily, and weekly charts, it gains importance.

LAWS OF MULTIPLE TIME FRAMES

1. Every time frame has its own structure.

2. The higher time frames overrule the lower time frames.

3. Prices in the lower time frame structure tend to respect the energy points of the higher time frame structure.

4. The energy points of support/resistance created by the higher time frame's vibration (prices) can be validated by the action of lower time periods.

5. The trend created by the next time period enables us to define the tradable trend.

6. What appears to be chaos in one time period can be order in another time period.

What Is Multiple Time-Frame Analysis?

Most technical traders in the foreign exchange market, whether they are novices or seasoned pros, have come across the concept of multiple time frame analysis in their market educations. However, this well-founded means of reading charts and developing strategies is often the first level of analysis to be forgotten when a trader pursues an edge over the market.

In specializing as a day trader, momentum trader, breakout trader or event risk trader, among other styles, many market participants lose sight of the larger trend, miss clear levels of support and resistance and overlook high probability entry and stop levels. In this article, we will describe what multiple time frame analysis is and how to choose the various periods and how to put it all together.

What Is Multiple Time-Frame Analysis?

Multiple time-frame analysis involves monitoring the same currency pair across different frequencies (or time compressions). While there is no real limit as to how many frequencies can be monitored or which specific ones to choose, there are general guidelines that most practitioners will follow.

Typically, using three different periods gives a broad enough reading on the market - using fewer than this can result in a considerable loss of data, while using more typically provides redundant analysis. When choosing the three time frequencies, a simple strategy can be to follow a "rule of four." This means that a medium-term period should first be determined and it should represent a standard as to how long the average trade is held. From there, a shorter term time frame should be chosen and it should be at least one-fourth the intermediate period (for example, a 15-minute chart for the short-term time frame and 60-minute chart for the medium or intermediate time frame). Through the same calculation, the long-term time frame should be at least four times greater than the intermediate one (so, keeping with the previous example, the 240-minute, or four-hour, chart would round out the three time frequencies).

It is imperative to select the correct time frame when choosing the range of the three periods. Clearly, a long-term trader who holds positions for months will find little use for a 15-minute, 60-minute and 240-minute combination. At the same time, a day trader who holds positions for hours and rarely longer than a day would find little advantage in daily, weekly and monthly arrangements. This is not to say that the long-term trader would not benefit from keeping an eye on the 240-minute chart or the short-term trader from keeping a daily chart in the repertoire, but these should come at the extremes rather than anchoring the entire range.