Multiple time frame analysis concept for every trader
Recent price action of XAUUSD offers an excellent resource for the analysis of ‘what is the trend?‘ on multiple time frames.
XAUUSD fell over 4.4% last week; this was the biggest price correction year to date. Due to the size of the correction, many analysts, bloggers came out to shout XAUUSD weakness, how it is reversing, how the trend is now bearish and so on. Is this true? Only by some measures. In this post I will explain how trend can be determined, how trend is subjective and can change on different time frames and which trend to use should be very a very personal choice i.e. that each trader should decide which trend to use in conjunction with personal trading habits, time horizon and trading objective.
Salient points to note about trend:
- Price trend appears different when charts of different time frames are looked at.
- Any trader looking at XAUUSD can discover different trends on different charts; 2 persons looking at charts of two different time frames are likely to disagree with each other.
- Up trend, down trend and sideway ranging price action can co-exist.
- If you go to a trading conference on XAUUSD and asked any group of traders “what is trend?” they will offer different answers.
- If you asked the conference speaker “what is trend?” you are putting him in a spot. The most likely answer you will get is “it depends”. It depends on what time frame you are looking at. Without qualifying which time frame you are looking at in your question, it becomes open ended. And therefore you can only expect an open uncommitted answer.
- If you decide to trade by following someone else, it is important to check whether the time horizon of his trade fits yours. If it does not, his action might not suit you.
- A scalper might be looking at a very short time frame and focusing on the most recent trend. An investor is likely to look over a very long horizon. Recent price movements might be factored into his decision making but may not have the most emphasis.
- Your trading action depends on correct reading of trend so mastering this concept fully is vital to your trading success.
XAUUSD case study: every chart tells a different story
Coming to my case study for this post, last week’s (Week 40) XAUUSD correction is the biggest traders encountered year to date (see Chart #1).
Chart #1: XAUUSD weekly chart June 2016 – present | Source: TradingView.com
If we zoomed into price action for Week 40 only, say on the hourly time frame, it is evident why XAUUSD see a down trend.
Chart #2: XAUUSD hourly chart 03 – 07 October 2016 | Source: TradingView.com
But even if we go lower, we cannot achieve a consensus about trend because in a 5-minute time frame (Chart #3), a day-trader might declare that XAUUSD is trending up if he is only looking in for an hour near the end of the day.
Chart #3: XAUUSD 5-minute time frame 07 October 2016 | Source: TradingView.com
Not only does price trend look different when we look in on different time frames, it will look different when we insert trading indicators such as moving averages, Bollinger Bands and so on. In Chart #4 below, I inserted two features:
- 13-week exponential moving average in red, 52-week exponential moving average in blue
- Pink boxes to show years with new 52-week lows and light green boxes that show years with new 52-week highs
Based on Chart #4, we can see that XAUUSD has a new 52-week high and the two moving averages have produced a golden cross earlier this year. Based on these features, XAUUSD might be down last week but that down was a retracement in a year to year up trend. If you go back to the hourly time frame, these pair of moving averages will produce a bearish trend reading.
Chart #4: XAUUSD weekly chart late 2012 – present | Source: TradingView.com
Up or down comes back to your own application
Since trend can be up and down at the same time based on different measures, each trader has to decide which chart to follow. The starting point is a very clear understanding of your own trading strategy and plan. Every plan should be personalised. For example, a scalper should stick to a low time frame analysis based on 5-, 15-minute charts while an investor could look at weekly, monthly or even quarterly charts. Once this is done, trade according to the trend presented in your choice of charts accordingly. This is the right way to approach multiple time frame analysis.
Salient points about multiple time frame application
- Which time frame to look depends on your personal trading plan.
- Traders looking at very short trade durations should use lower time frame charts.
- Investors with very long trade durations should apply higher time frame charts.
- If you formulate your own strategy, you might have to do some testing to get the right charts to fit your plan.
- If you attend trading courses provided by educators, their trading strategy should cover multiple time frame analysis with an emphasis on the correct time frame you are supposed to use with their strategy.
- Ultimately traders may need to master multiple time frame analysis by combining them i.e. to be able to see price as fractals, as trend within trend.
- Overlays of price action on different time frames can be applied. See charts here and here.
What should traders do?
This is a general guide to prepare oneself mentally and psychologically.
1. Your trading plan should fit your personal objective(s).
2. Put together the facts and arrive at your conclusion.
3. Determine what kind of price action will change your mind. Until these appear, do not waiver.
4. Accept that other traders have different observations and may disagree with you.
5. Their disagreement does not make you wrong; each of you is looking at a different part of the market.
6. Learn from others but resist the urge to follow another trader unless you know his plan is the same as yours.
7. When you are unclear step aside. Do not blindly follow others.
8. Do not wear multiple hats at the same time.
9. Focus on doing one thing correctly and consistently .
What these 3 groups of traders/investors can look at
- Investors, speculators looking at the next few months can see XAUUSD as a bullish reversal doing a throwback to form higher low. The evidence to support this is the new 52-week high earlier this year which has terminated 2013- 2015 down trend. The current price moment is a throwback or retracement. The strategy to adopt is to wait for evidence of support, to go long as a continuation of bullish price movement that started end of 2015.
- Swing traders who are looking for price action in the next one or two weeks might want to wait for pullback to short at high. This strategy depends on bearish momentum from last week’s steep correction to follow through.
- Scalpers might not need to worry about the big trend too much but scalpers do need to predict where all the major support and resistance levels are. Anything in between is the scalper’s playground as long as there is momentum in the lower time frames but sstay clear away from important support and resistance levels because when big players step in, price trend on lower time frame could change rapidly. Besides looking at intraday movement, a scalper might look at price action the day before as a reference.
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
Soh's Twitter account @sohtionghum
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."