Multiple Time Frame Analysis

Multiple time frame analysis is a top-down approach to studying price action.  Typically a trader starts by looking at longer time frames and moves down to shorter time frames like intraday charts.

Multiple time frame strategy is a logic-based trading system used by professional traders. It’s a purely technical trading strategy with giving a high probability of a predictable outcome. As this trading style is purely technical, traders don’t need to consider any fundamentals.

In Multiple Time Frame Analysis, a trader studies different lengths of time and considers how they can affect the price. Longer time frames have more effect on the price as the “smart money” operates on these larger time frames.

A multiple time frame strategy will position a trader correctly. The strategy positions the trader in the direction of the market trend. While pinpointing optimal entries into trades on the lower time frames.

We also want to seek agreements between the time frames. If the longer time frame is bullish, we want to make sure the short time frame is also bullish. And vice versa for bearish longer time frames. This will lead to potentially more accurate and higher-probability trades.

The general idea behind multiple time frame analysis has three components:

  • Establish a directional bias by identifying the main trend using longer time frames. If there is no trend a trader should stop trading until a clear trend can be established.
  • 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 the Time Frames

How do you choose your time frames? We work with three different time frames to look for trends, to look for a pullback and for a breakout. First, you have to choose the time frame you feel more comfortable trading. No trader is the same – 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 have to multiply your intermediate time frame by 4, 5 or 6.

In order to get your short-term time frame take your intermediate time frame and divide it by 4,5, or 6.

These rules are only suggestions and are not set in stone. 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. This is because the Daily chart is considered to be where the smart money operates.

Example Setup:

  • 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.
  • The 15-minute as your short-term time frame.

Multiple Time Frame Analysis Example

When doing multiple time frame analysis, always start working with the long-term time frames. This time frame will only show if there’s a trend and will help you establish the directional bias.

In Figure 1 we have the GBP/USD daily chart. By using the 9 and 18 moving averages, we can identify that we’re moving in a very strong bearish trend. This means the setup for the trade will very likely be to sell.

Figure 1: GBP/USD Daily Chart Figure 1: GBP/USD Daily Chart[/caption]

On the intermediate time frame, we 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. But if the overall trend is down, look for the market to turn from overbought levels.

Figure 2: GBP/USD 1H Chart

Figure 2: GBP/USD 1H Chart

The short-term time frame will time the market and find the optimal entry levels in the direction of the trend. We use the short-term time frames for pinpointing entries and exits. Once we have identified an overbought or oversold level in the intermediate time frame, we switch to the lower time frame to enter our trade. 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.

Figure 3: GBP/USD 15-Minute Chart

Figure 3: GBP/USD 15-Minute Chart

Trading Forex and CFDs is not suitable for all investors and comes with a high risk of losing money rapidly due to leverage. 75-90% of retail investors lose money trading these products. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.