A multi-time frame analysis is a top-down approach of studying the price action starting from the higher time frame and moving down to intraday charts. It’s important to note that higher time frames usually carry more weight to the price because “smart money” operates on these larger time frames. A multiple time frame strategy is very logical and a high-probability style of trading that many professional traders use. It’s purely technical trading so you’re not going to pay any attention to the fundamentals with this particular type of trading strategy.
A multiple time frame strategy will position you in the direction of the overall trend while pinpointing optimal entries on the lower time frames. We also want to seek agreements in the time frames and in this regard if the higher time frame is bullish, we want to make sure the lower time frame is also bullish and vice versa for bearish higher time frames. This will lead into potentially more accurate and high-probability trades. The general idea behind the multiple time frame analysis has three components:
- Establish a directional bias by identifying the main trend using higher time frames. If there is no trend we’re going to stop trading until we can establish a clear trend.
- Secondly, we’re looking for a pullback and a recovery within the main trend.
- We’re waiting for a breakout in the direction of the trend for our entry trigger level.
Choosing Time Frames
How do you choose your time frames? Basically, we’re going to work with three different time frames to look for trends, to look for a pullback and for a breakout. First of all, you have to choose the time frame you feel more comfortable trading with because not every trader is the same as some are very short-term traders while others are long-term traders.
The general rule is that you should use the preferred time frame as the intermediate time frame. In order to get your long-term time frame, you will have to multiply your intermediate time frame by 4, 5 or 6. And in order to get your short-term time frame you’re simply going to get your intermediate time frame and divide it by 4,5, or 6. These are not set in stone rules and if your preferred time frame is an intraday chart like the 5-minutes or 15-minutes time frames it’s recommended you use the Daily chart as your long-term time frame because the Daily chart is considered to be the place smart money operates.
So for example, if your preferred time frame to trade is the 1-hour chart this will be your intermediate time frame. This means you are going to use the Daily Chart as your long-term time frame, and the 15-minute as your short-term time frame.
Multiple Time Frame Analysis at Work
When doing multiple time frame analysis, we always start working with the long-term time frames. This time frame only shows you whether or not there’s a trend and will help you establish the directional bias. In Figure 1 we have the GBP/USD daily chart and by simply using the 9 and 18 moving averages, we can clearly identify that we’re moving in a very strong bearish trend and this inevitably means we’re only going to sell as a high probability setup.
On the intermediate time frame, we’re going to gauge the market momentum and possible overbought/oversold turning signals in the direction of the trend spotted in the higher time frame chart. If the overall trend is up, look for the market to turn from the oversold levels, and if the overall trend is down, look for the market to turn from overbought levels.
The short-term time frame will be used to time the market and find the optimal entry levels in the direction of the trend. In simple terms, we use the short-term time frames for pinpointing entries and exits. Once we identified an overbought or oversold level in the intermediate time frame, we switch to the lower time frame to enter our trade and use any technical levels as a trigger, such as the break of support to enter short, if we’re in a bearish trend; and buy at the break of resistance if we’re in a bullish trend.