Multiple Time Frame Analysis in Detail
In this article, I am going to discuss Multiple Time Frame Analysis in detail. Please read our previous article where we discussed How to Day Trade with Trend in detail. If you identify level correctly and confluence across different time frames, you can actually increase your winning trade. So, as part of this article, we are going to discuss the following pointers in detail.
- What is multiple timeframe analysis?
- Understanding the trend with multiple timeframe analysis
- How to use multiple time frame in trading
- Advantages of multiple timeframe analysis
- Entry principle for multiple time frame
Once we identify the current trend we need to anticipate what would have to occur to make the price fall into a sideways trend, or reverse. Some common reversal patterns are
- 123 REVERSAL
- Double Top/bottom
- Up THRUST/SPRING
- Head and shoulder
WHAT IS FRACTAL?
Fractals are just smaller things that combine to create bigger things. Each of the smaller things is identical in shape to the larger thing.
How do Fractals apply to Financial Markets?
Markets do the same thing as what we see in nature, creating “patterns within patterns” from smaller timeframes to larger ones. Larger timeframe swings are comprised of several identical smaller-timeframe swings.
We use a “Factor of Five” to break up the different timeframes.
- A month is around 25 trading days so 25/5 = 5 weeks
- Weak is 5 days trading day s 5/5=1 day
- The day is around 6:30 active hours so 6:30/5=78 minutes
- Even lower time frame 78/5=15 minutes for day trading
What is the Multiple Time Frame Analysis?
The multiple time frame analysis is nothing but analyzes multiple timeframe charts of a single instrument. Let’s understand in a chart
Let’s see an example with three timeframes
Understanding Trends with Multiple Time Frame
There are two major rules for multiple timeframe analysis:
- Larger Timeframes establish and dominate the trend.
- Reversals start from the smaller timeframes first and propagate upwards.
Let’s go back to our two main price action rules.
Larger Timeframes establish and dominate the trend.
This means when a larger timeframe trend is in play, you will see pullbacks on the smaller timeframes.
Reversals start from the smaller timeframes first and propagate upwards
This means that we’ll see this changing structure show up on the shorter timeframe charts first.
HOW TO USE MULTIPLE TIME FRAME?
We will be able to differentiate a “pullback” on the smaller time frame chart vs. the beginning of a correction in the larger time frame. Let me explain to you
We will be able to read the “smaller” timeframes to see when that pullback is about to reverse.
We will also be able to spot potential reversals before the structure change
Advantages of using multiple time frames that we cover include:
- Allowing the trader to get a micro view of larger time frames, which can, in turn, conﬁrm the trader’s original analysis of trade. It is like using a backup pattern and ﬁne-tuning an entry. An example would be having a pattern on a 60-minute chart and using a 5-minute chart to conﬁrm the entry. (See Figures 8.12 through 8.14 an example.)
- Risk can be managed more effectively by combining time frames. A trader can learn to move stops on smaller time frames for patterns that complete on larger time frames.
- Using multiple time frames from larger to smaller can help the trader to be aware of contrary or opposing patterns that form on smaller time frames that are against the longer-term time frame.
MULTIPLE TIME FRAME ENTRY PRINCIPLE
- Define what your “signal” chart is. For swing traders, this will generally be a Daily chart. For Day traders, this will be a smaller timeframe like 2/5/10/15 minutes chart
- Add a higher time frame chart that is either 5x or 25x larger than your signal chart.
- Trade your signal chart as before, but trade in the direction of the swings on that higher timeframe chart!
Let me explain to you
While the bigger frame like daily is trending and in impulse, you would have CYCLES of impulses and correction in the hourly frame. This is the most important phase. You have to find the conjunction when the hourly comes in the impulse.
Let’s take day trading example
Daily time frame market overview (uptrend)
Hourly time frame strategy development (price reverse after a pullback )
5minute timeframe execution
Day Trade when the long-term structure, daily swing structure, and intraday structure are all in synchronizing
Open chart and start the top-down analysis, from monthly chart to 15b minute chart
That’s it for today. In the next article, I am going to discuss the Head and Shoulder Pattern in detail. Here, in this article, I try to explain the Multiple Time Frame Analysis in detail. I hope you enjoy this article. Please join my Telegram Channel to learn more and clear your doubts. https://t.me/tradingwithsmartmoney.