Multiple Time Frame Analysis in Trading
In this article, I will discuss Multiple Time Frame Analysis in Trading. Please read our previous article discussing 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 will discuss the following pointers, which are related to multiple time frame analysis.
- What is multiple timeframe analysis?
- Understanding the trend with multiple timeframe analysis.
- How do you use multiple time frames in trading?
- Advantages of multiple timeframe analysis.
- Entry principle for multiple time frames.
Once we identify the current trend, we need to anticipate what would 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 Multiple Time Frame Analysis?
The multi-timeframe analysis is nothing but an analysis of 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 Frames
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 FRAMES?
We can 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 can read the “smaller” timeframes to see when that pullback will reverse.
We will also be able to spot potential reversals before the structure change
Advantages of Using Multiple Time Frames:
- 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 as 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 the 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 synchronizing
Open the chart and start the top-down analysis, from a monthly chart to 15b minute chart.
Summary of Multiple Time Frame Analysis in Trading
Multiple Time Frame Analysis (MTFA) in trading is a technique traders use to evaluate and analyze the price movements of a security by looking at various time frames on the charts. It is a thorough approach that helps identify the overall market trend, the intermediate-term trend, and the short-term trend. By examining different time frames, traders can make more informed decisions and improve their trading strategies.
How Multiple Time Frame Analysis in Trading Works?
Step 1: Identify the Long-Term Trend: The trader begins by examining a longer-term time frame, such as weekly or monthly charts, to identify the general market direction or trend. This step is crucial because it allows the trader to align their trades with the predominant trend, often considered the ‘safer’ path.
Step 2: Analyze the Intermediate-Term Trend: Next, the trader moves down to a shorter time frame, such as the daily chart, to observe the intermediate-term trend. This can provide context for what is happening in the longer-term trend and help the trader identify the best areas to enter or exit a trade.
Step 3: Determine the Short-Term Trend: The final step is to examine an even shorter time frame, like the hourly or 4-hour charts, to identify the short-term trends and potential entry or exit points. This is where the trader looks for specific signals or patterns that align with the long-term and intermediate trends.
Benefits of Multiple Time Frame Analysis in Trading:
- Trend Confirmation: MTFA helps in confirming trends across different time frames, increasing the likelihood of making profitable trades.
- Signal Reinforcement: If a trading signal is present across multiple time frames, it is considered stronger and more reliable.
- Risk Management: By understanding the trends in different time frames, a trader can better manage risk by setting appropriate stop-loss orders and take-profit levels.
- Entry and Exit Points: MTFA can improve the accuracy of identifying entry and exit points, as it provides a broader perspective on the market.
Tips for Multiple Time Frame Analysis in Trading:
- Consistency in Analysis: Use the same technical indicators or patterns across different time frames for consistency.
- Not Overcomplicating: While MTFA is insightful, using too many time frames can lead to analysis paralysis. Stick to two or three key time frames.
- Understanding Market Structure: Know key support and resistance levels in each time frame.
- Correlating Time Frames: The time frames should be logically correlated; for example, a day trader might look at the 1-hour, 15-minute, and 5-minute charts.
Limitations of Multiple Time Frame Analysis in Trading:
- Conflicting Signals: Different time frames may sometimes produce conflicting signals, which can be confusing and may lead to indecision.
- Overtrading: When using multiple time frames, there’s a risk of overtrading due to the abundance of signals, especially if they are not properly filtered.
- Lagging Nature of Indicators: If relying on indicators, remember that most are lagging and may not accurately predict future price movements.
A trader might see a bullish trend on the weekly chart and then wait for a pullback on the daily chart to find an optimal entry point. Finally, they would drill down to the hourly chart to refine their entry and determine the exact point to execute the trade.
Multiple Time Frame Analysis is a powerful tool for traders, but like all strategies, it is not foolproof. It requires practice to interpret the information correctly and should be combined with other forms of analysis and sound risk management practices.
In the next article, I will discuss the Head and Shoulder patterns in detail. Here, in this article, I try to explain the Multiple Time Frame Analysis in Trading. I hope you enjoy this multiple-frame Frame Analysis in the Trading article and understand multiple time frame analysis in trading. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts.
About the Author: Pranaya Rout
Pranaya Rout has published more than 3,000 articles in his 11-year career. Pranaya Rout has very good experience with Microsoft Technologies, Including C#, VB, ASP.NET MVC, ASP.NET Web API, EF, EF Core, ADO.NET, LINQ, SQL Server, MYSQL, Oracle, ASP.NET Core, Cloud Computing, Microservices, Design Patterns and still learning new technologies.