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Learn Why Multiple Time Frame Analysis is Key for Trading

April 09, 2018 18:51

Source: Shutterstock

Dear traders,

Do multiple charts give you that extra edge when analysing price patterns, trends, and Support & Resistance?

It should provide a ton of extra value. For me, analysing the charts with the help of multiple time frames is an absolute must because it gives me the best possible perspective.

This article explains why multiple time frame analysis is critical and how it is done.

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Filtering Out Bad Setups

When I'm trading on lower time frames (e.g., 15-minute charts), it is not always clear which triggers and setups have a better chance of success. Sometimes, setups look pretty much identical, but some work out well and others fail miserably. Why?

It is interesting that the result tends to be the same regardless of the tool or indicator used or tested… This does not seem to offer a profitable filter to me.

Luckily, there is good news… Multiple time frame (MTF) analysis helps me filter out weaker setups. An example always works best.

For instance, last week, I was thinking about taking an EUR/USD short setup on the 15-minute chart. Downtrend seemed well-established, and a continuation after the bearish break was a setup worth considering… See the chart below.

Image: EUR/USD 15-minute chart using MT5 Supreme Edition from 3 to 4 April, 2018

This was a setup worth considering until I saw higher time frames, such as the 4h and daily charts, which clearly indicated that the bearish trend (on the 15min chart) was lacking space.

Clear and heavy support was close by, and the odds of such a trade working out are lower. It was time to skip this setup and focus on other trading opportunities. See the chart below for 4h and daily charts.

Image: EUR/USD 4-hour chart using MT5 Supreme Edition from 3 to 4 April, 2018

Lower Time Frames Are Also Key

The first paragraph might give you the impression that higher time frames will always provide more information than lower time frames.

This is not necessarily true because the financial charts are fractal in nature, which means that price patterns repeat on all scales, from low to high, in a similar way.

That is exactly why lower time frames can also help out when analysing higher time frames. For instance, you might be considering a long setup based on the daily candle, but will the price continue immediately or will there be a retracement first?

Traders can gain more information about the chance of a break or pullback by zooming into the lower time frames and checking whether the price was able to push through local support levels or not:

  • A breakout on that time scale is likely to continue;
  • A bounce could indicate a potential retracement.

What Are the Best Time Frames?

If you are paying close attention to this article, you already know the answer... all of them are key. That said, I do have some personal favourites.

I tend to use the following time frame combinations:

  1. Swing trading: weekly, daily, 4h charts;
  2. Intra-day/week trading: daily, 4h, 1 hour charts;
  3. Intra-day trading: daily, 1h, 15min charts.

Long-term traders could use a monthly, weekly, and daily (or 4h) chart combination. Scalpers could perhaps go with a 1-hour, 15-minute, and 5-minute chart combination.

The good news is, there are methods to quickly perform MTF analysis by using such special indicators as the Mini Charts from MT4 Supreme Edition package.

What Is the Best Time Frame Combination?

Although all time frames have their own benefits, I do think that each time frame is particularly useful for these three key aspects of trading:

  1. Spotting Support & Resistance

Support & Resistance is key for the higher time frames. Reviewing the weekly chart, for instance, is useful when you are a swing trader.

  1. Identifying the trend and patterns

The middle time frames are the best for viewing trend, momentum, correction, and patterns in general. For swing traders this would be a daily chart, whereas for intra-day or intra-week traders, a 1-hour or 4-hour chart.

My main purpose is to measure whether there is a trend, Is there impulsive or corrective price action, are there signs of exhaustion like divergence or reversal patterns, and are there signs of continuation patterns?

  1. Searching for entries

The lowest time frames are the best trigger chart and are useful for trading purposes. It is the best for finding the entry and also for taking a trade setup.

In most cases, I use candlestick patterns to confirm my entry point. For instance, with bounce setups, I will wait for a wick or exhaustion candle. With breakout setups, I will wait for strong candle closes.

As you can see, time frames are especially relative. The best time frame for you will depend on your preferred type of trading and other factors… But one aspect remains true when trading a Demo or Live account using multiple time frame analysis – a useful concept for most traders.

Please note that there is nothing wrong with single time frame analysis, but I obviously see clear benefits performing multiple time frame analysis… Specifically, when using three charts with three different roles.

Wishing you a happy week of trading,

Chris Svorcik

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