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MTFA: Multiple Time Frame Analysis in Forex Trading

Reading time: 15 minutes

There are several types of Forex analysis. Most traders will know about fundamental analysis, market sentiment, and technical analysis. There is another type of analysis which can be overlooked at times, but is something that most, if not all, traders will have come across at some point - particularly, those interested in technical analysis, and that is Forex Multiple Time Frame Analysis (MTFA). This type of analysis is easily forgotten by traders as they pursue more specific markets.

MTFA in Forex Trading

When specialising as a momentum trader, a day trader, an event risk trader, or a breakout trader, many participants of the market lose sight of the larger trend and may miss clear levels of support and resistance, and may also fail to notice high probability entry-stop levels. The overall purpose of this article is to explore what multiple time-frame FX analysis stands for and how to understand it.

What is the Meaning of Multiple Time Frame Analysis?

Multiple time frame analysis (or MTF) in Forex trading involves monitoring the same currency pair across various frequencies, also known as time compressions. MTF trading is a process of looking into different time frames and aligning both trend, momentum, and direction. Since there is no real maximum as to how many of the frequencies can be monitored, or which particular ones to choose, there are instead general guidelines that the majority of traders follow.

Utilising three different periods is usually enough to provide a wide enough reading on the market. Applying fewer than this can end in a substantial loss of data, whilst using more typically provides irrelevant analysis. When choosing the three time frequencies, an uncomplicated strategy is to follow the rule of four.

This implies that a medium-term period must be first identified, and it should illustrate a standard as to how long the average trade is held. From there, a shorter frame of time should be selected, and it must be at least a quarter of the intermediate period. For instance, a 15-minute chart for the brief-term time frame, and a 60-minute chart for the medium time frame.

Using an identical calculation, according to multiple time frame trading, the long-term time frame must be at least four times greater than the medium one. Thereby keeping with the preceding example, the 240-minute or 4-hour chart would round out the three time frequencies.

It is critical to choose the right time frame when selecting the range of the three periods. A long-term Forex trader who holds certain positions for months will find little use for 60 minute, 15 minute, and 240 minute combinations. Conversely a day FX trader who holds positions for hours and seldom longer than a day would gain little advantage in daily, weekly, or monthly arrangements.

Multiple time frame analysis - EUR/USD Chart

Source: MarketWatch - An example of multiple time frame analysis - EURUSD Chart

The Appliance of Long-term Time Frames

We've covered the basics of multiple time frame analysis in Forex, so now we'll look at how to apply it to the FX market directly. With this approach of studying charts, it is usually a good idea to begin with a long-term time frame, and then work down to the other frequencies. By observing a long-term time frame, the prevailing trend can be established.

It is important to remember the most excessively used aphorism in trading for this frequency - the trend is your friend. Arrangements should not be executed on this broad angled chart, yet the trades that are taken should be in the same direction as the trend.

This doesn't actually mean that trades cannot be taken against the larger trend, however, those that are will most likely have a considerably lower probability of success, and the profit target will be smaller than if it was moving forward in the direction of the general trend. Make sure to take that into account when trading multiple time frames.

In the currency markets - when the long-term frame of time has different periods such as daily, weekly, or monthly - fundamentals tend to have a substantial impact on direction. Therefore, a FX trader has the task of monitoring the main economic trends when following the overall trend on this frame of time.

Whether the key economic concern is current account shortages, consumer spending, business investment, or any other list of influences, those developments should be tracked to much better understand the direction in price action. This is one of the primary multiple time frame analysis techniques.

Another contemplation for a higher frame of time in this range is in fact interest rates. Often used as a reflection of an economy's health, the interest rate is an essential element in pricing exchange rates. Under most circumstances, the capital will flow toward the currency with the higher rate in a pair, as this relates to much greater returns on investments.

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The Appliance of Medium-term Time Frames

Now we will move onto the next step of our guide for multiple time frame analysis in the Forex market. We'll look at the medium time frame with smaller movements within the broader trend becoming more recognisable. That is the most flexible of the three frequencies, due to the fact that the sense of both the longer-term and the short-term frames can be acquired from this level. As we have previously mentioned, the anticipated holding period for an average trade should determine this anchor for the time frame range. As a matter of fact, this level is the most often followed chart when planning a trade.

The Appliance of Short-term Time Frames

There are certain trades that should be performed on the short-term time frame. When smaller fluctuations in price action become clearer, a Forex trader is better able to select an attractive entry for a position, whose direction has already been identified by the charts of higher frequency.

Perhaps another important consideration for this period is that fundamentals once again substantially affect price action in these charts, though in a very different way than they do for the higher time frames. Fundamental trends are no longer visible when charts are under a four hour frequency.

Consider the following when applying multiple time frame analysis - the short-term frame will reply with enlarged volatility to those FX indicators that are dubbed 'market moving'. The more granulated this lower time frame is, the greater the reaction to economic indicators will actually seem.

Most of the time, those sharp movements last for a short time and as such, are occasionally described as noise. Nevertheless, an FX trader will frequently avoid making poor trades on these interim imbalances, as they keep an eye on the progression of the other time frames.

MetaTrader 4 - Currency Pair charts

Source: MetaTrader 4 - A GBP/USD 4 Hour chart and a GBP/USD Daily chart being analysed side-by-side.

The Result of Putting All Time Frames Together

When all three time frames are combined to assess a currency pair, a Forex trader can easily enhance the odds of success for a trade. Executing the top-down analysis encourages trading with relatively larger trends. In fact, this alone lowers risk because there is a higher possibility that price action will, in the end, continue on the longer trend.

By utilising this theory, the level of confidence in a trade should be evaluated by how the multiple time frames align. For instance, if the larger trend is to the upside but the intermediate-term and short-term trends are moving lower, cautious shorts have to be taken, with rational profit targets, as well as stops. As an alternative, an FX trader may wait until a bearish wave runs its direction on the lower frequency charts, and may then aim to go long at a satisfying level when the three time frames align once more.

Another benefit of integrating Forex multiple time frames into analysing trades is the capability to determine support and resistance readings, as well as strong entry-exit levels. The chance of success for a trade is enhanced when it is followed exactly on a short-term chart, owing to the ability for a trader to keep away from poor entry prices, senseless targets, and ill-placed stops.

Filtering Out Bad Setups

When 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 why do some work out well, while others fail? It is interesting that the result tends to be the same regardless of the tool or indicator used or tested.

Luckily, there is good news. Multiple time frame (MTF) analysis helps professional traders to filter out weaker setups. For instance, in the following example, the trader was contemplating taking an EUR/USD short setup on a 15-minute chart. The down trend seemed well-established, and a continuation after the bearish break was a setup worth considering, as is evident in the chart provided below:

MetaTrader 5 Supreme Edition - 15 minute EUR/USD Chart

Source: MetaTrader 5 Supreme Edition - EUR/USD 15-minute chart - Data Range: 3 April, 2018 - 4 April, 2018

This was a setup worth considering until the trader saw higher time frames, such as the 4h and daily charts, which clearly indicated that the bearish trend (on the 15 min chart) was lacking space. Clear and heavy support was close by, and the odds of such a trade working out were lower. It was therefore time to skip this setup and focus on other trading opportunities. The chart below provides an example of 4h and daily charts:

EUR/USD 4 hour chart and daily chart

Source: MetaTrader 5 Supreme Edition - EUR/USD 4H and Daily Charts side-by-side - Data Range: 3 April, 2018 - 4 April, 2018

Lower Time Frames Are Also Key

You might have 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 a 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 a pullback by zooming into the lower time frames and then checking whether the price was able to push through the local support levels or not. For example:

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

Trends, Momentum, and Entries

Trend

A trend is a series of Higher Highs and Higher Lows (uptrend), or a series of thrust and pullback. Very occasionally, the trend can be shadowed by the so-called 'whipsaws'. In that case, the trend is not seen clearly. Because of that, we have developed a custom MACD indicator as an example, that displays trends in the following way:

  • Higher Time Frames: Monthly, Weekly, Daily - The histogram is thick blue for an uptrend or thick red for a downtrend:

MACD Indicator

Source: ecs.MACD Indicator

  • H4, H1, M15, and Lower Time Frames - The histogram is thick blue, and the blue MACD line is above the 0 line for an uptrend. For a downtrend, the histogram is thick red, and the blue MACD line is below the 0 line.

This example demonstrates an uptrend:

MACD indicator

Source: ecs.MACD Indicator

This example demonstrates a downtrend:

MACD Indicator

Source: ecs.MACD Indicator

Momentum

When determining the trend on a specific time frame, we need to move one time frame lower to find the momentum. In order to align trend and momentum, we need to have an opposite move from the trend. To find an entry, we must first wait for a retracement (i.e. the buy-low-sell-high principle).

The retracement on the MACD is indicated by a thinning histogram. For example, if we have an uptrend on a daily time frame indicated by a thick blue histogram, then 4h should have a thinning histogram, and that indicates a 4h retracement. By aligning a daily trend with a 4h momentum, we can then move on to lower time frames and search for an entry.

MACD Indicator

Source: ecs.MACD Indicator

Entry

For entries, some traders would use a momentum time frame, whereas others might want to drill down to a lower time frame, and then search for an entry. In the case of the daily trend, and a H4 retracement, the entry time frame is usually H1, M30, or M15.

Traders might want to use different price action tools, confluence, candlesticks, or whatever method they see fit for an entry. The entry time frame is important as this is when and where entries are made. Effectively, the entry time frame uses higher time frames for momentum, and trends for a decision.

What Are the Best Time Frames?

Here are time frame combinations for you to consider using in your trading setups:

  • Swing trading: weekly, daily, 4h charts
  • Intra-day/week trading: daily, 4h, 1 hour charts
  • Intra-day trading: daily, 1h, 15 min charts

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

The good news is there are several methods available to professional traders that enable them to quickly perform MTF analysis, by using special indicators such as the Mini Charts that are available in the MetaTrader 4 Supreme Edition plugin.

What Is the Best Time Frame Combination?

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

  • 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.
  • Identifying the trend and patterns - The middle time frames are the best for viewing trends, momentum, corrections, 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 would be appropriate.

The trader's main purpose is to measure whether there is a trend, whether there is impulsive or corrective price action, if there are there signs of exhaustion like divergence or reversal patterns, and if there are signs of continuation patterns.

  • 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, traders use candlestick patterns to confirm entry points. For instance, with bounce setups, traders might wait for a wick or an exhaustion candle. With breakout setups, traders might 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 important factors of course.

But one aspect remains true when trading with a demo trading account or a live account, and using multiple time frame analysis – a useful concept for most traders. Please note that there is nothing wrong with single time frame analysis, but professional traders might see clearer benefits performing multiple time frame analysis, specifically when using three charts with three different roles.

Conclusion

The utilisation of MTFA can significantly enhance the odds of making a successful trade. Unfortunately, a lot of traders overlook the usefulness of this technique once they start to find a particular niche. However, it is a great starting point for newbies, and is certainly one worth revisiting for experienced traders.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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