Understanding multiple time frame analysis is crucial to understanding trend in forex
When you ask a forex trader ‘what is the trend?’, many come back ‘trend in what time frame?’ You see: traders approach the market in ways ranging from quick-in quick-out speculative trading to buy-and-hold investment. So there is also a proliferation of charts with multiple time frames. The MT4 software that I use for trading has eight different time frames to choose from.
So what is the implication of using so many charts?
You could pull out charts each telling you a different story and seldom do they agree with each other.
A new trader who has not decided how he intends to approach the market will be dazzled by it. A different setup in each chart tells an equally compelling story. A good analogy is the three blind man trying to describe an elephant based on the part that each individual encounters. A trader could walk into a ‘labyrinth’ of multiple time frames and get stuck for a long time trying to determine what trend the market is in.
Multiple time frame analysis is therefore something that forex traders have to master. In this article, we will visit the following concepts to do with multiple time frame analysis and at the end, I hope to shed light for traders who have to grapple with it daily.
- What is multiple time frame analysis?
- What problems does multiple time frame pose?
- What are the essentials of a good strategy that takes into account multiple time frame?
What is Multiple Time Frame Analysis?
Let’s come back to the question ‘what is trend’? A trader has to be able to look through not one chart but a set of charts, cut through the noise and make trading decisions.
Chart A and B illustrates this point best. Let’s just imagine that we have two charts only, the 4-hour (Chart A) and the 5-minute (Chart B). The long bearish candle that is enclosed in a red box in Chart A shows a single 4-hour interval. Chart B shows the same 4-hour segment broken down into 48 pieces of 5 minute segments.
Depending on exactly which moment you look at price, you could get a different picture. Multiple time frame analysis is about putting together the real picture from many different charts.
What problems does multiple time frame pose?
Now because you could get charts of different time settings, forex traders face a challenge with the slew of information to process.
This simple increase in choice of chart settings creates a whole list of problems that plague traders.
- Misfit – Some traders use the wrong chart. The chart chosen does not fit their strategy or trading objective. If we were to borrow an example from the military, it is like an army general reading the small map of a platoon leader.
- Changing game plan – Some traders embark on a lifelong quest to search for the perfect chart setting. They end up constantly changing their strategy and never achieving mastery.
- Indecision – Some traders think that the more the merrier. They attempt to use many charts and each gives them a different picture. They get confused and become immobilised.
- False signals – Here I would single out one group of traders who also face exceptional danger: the ‘indicator-trader’. This trader ignores price action and over relies on the use of indicators. In the multiple time frame environment, I have found that trading indicators add to noise instead of filtering it. They work only when there is a proper co-ordination with the trading objective and the best-fit trading time frame.
- ‘I cannot see what you see’ – Ultimately chart readers would like to be able to see what everyone else sees. We would like act together at the moment when everybody else decides to take action. This is how high probability outcomes happen. There is synergy. When there are so many timeframes to choose from, new traders are unable to tap into this synergy because they don’t how to which time frame or picture to connect.
What are the essentials of a good strategy that takes into multiple time frame?
Since mastering the picture in multiple time frames is complex, many professional traders develop their own strategies. Rather than single out any method for discussion here (which might end up tedious and maybe not suitable to you dear reader), I will list essential components for you.
- Choose a chart to be the road map. There is where buy or sell decisions are made.
- Choose another chart that is typically a lower time frame to fine-tune or execute the buy or sell order. As an example, the road map might be a chart with 1-hour and you have decided it to be true to the trend of the market; you use a 15-minute chart to determine how you enter and exit your 1-hour trend. Even if 15-minute chart shows an opposite picture, you decide that it is merely a correction of the 1-hour trend.
- Inspect the ‘higher’ charts such as the daily or 4-hour charts occasionally because this is the big picture that ‘big boys’ like fund managers, analysts are looking at.
- Do not use more than 3 charts. Beginners should start with one whereas most will use two. For forex trading, the 1-hour chart or 4-hour is a good place to start.
- Your chosen time frames should not be too far apart. For example, don’t combine a 4-hour and a 1-minute chart.
- Find the road map that best fits your trading objective, the duration you intend to hold a position and desired level of volatility.
- Charts of lower time frame don’t necessary give you an edge in speed. In fact they produce a lot of noise.
I have some tips here for practicing sound multiple time frame analysis:
- Scalpers who like to trade short durations with 10 – 20 pip targets can use 5-minute and 1-minute charts together.
- Day traders who can hold a position for a few hours or overnight can combine 1-hour and 15-minute charts.
- Any person who is busy and is happy to do 1-2 trades a week can trade 4-hour and 1 hour charts.
- Anyone who wants to buy and hold and even earn some positive swap should really be looking at daily charts and above.
- Unless you have the patience to form your own strategy with a demo account, a good coach can speed the learning curve for you.
- Strategies that use support and resistance are the best because they stay true regardless of time frame. Technical studies that excel in this respect are price-based analysis such as Fibonacci Levels, Pivot Points, trendlines and support resistance levels.
Some other postings on this topic:
Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.
“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.