Multiple Time Frame Analysis
Oftentimes community members and other traders ask us how we find winning trades. A lot of traders apply what is called multiple time frame analysis. This is an analytical concept in trading which proves to be quite powerful when utilized the right way. The idea is to observe different time frames on the same currency pair being analyzed to identify market behaviors and trends on those time frames which would help us recognize what is happening within those time frequencies. Usually we are looking for information from the larger time frame to help guide our decision process on the lower trading time frame. The larger time frame will be the time frame larger than the one you wish to trade, and the smaller time frame will be the time frame smaller than the one you wish to trade. Example: if you wish to trade the 1-hour time frame, the larger time frame would be the daily time frame and the smaller time frame would be the 15-minute time frame.
Professional traders understand the benefit of multi time frame analysis, and they will usually segment their analysis into three distinct time horizons: the trading time frame, the bigger picture time frame, and the signal entry time frame.
Multi time frame analysis can help traders simultaneously increase their probability of success on a trade and minimize the risk exposure. While there are many new and fashionable trading techniques that are popping up all the time, there are some concepts such as support and resistance, price action, and multi time frame analysis which are timeless in nature. They have worked in the past, they work well in the present, and will continue to work in the future, because they are based in market logic.
Using three different time frames provides the best combination for reading a market’s price action. The first timeframe to consider is the trading time frame. This is the time frame that traders are used to spending most of their time on.
The second time frame that you must consider is the higher-level time frame. For example, if your trading time frame is the 1-hour chart, then your higher time frame should be the daily chart. This time frame provides you with the “bigger picture” view, and you would use this time frame to check major support and resistance zones, as well as the overall trend direction.
Finally, we should observe the smaller time frame. Using the same example, if your trading time frame is the 1-hour chart, then your smaller time frame would be the 15-minute chart. The purpose of the smaller time frame observation is to be able to time your trades for optimal entries. We typically zoom in on this timeframe only after we have confirmation of our trade setup on our trading timeframe and the higher timeframe.
Multiple time frame analysis provides you with a means by which you can improve your statistical trading edge. A key concept in trading is to always try whenever possible to trade with the trend. The question is, which trend? Multiple time frame analysis helps you to answer this question. Our trading edge can be further improved through better market timing, which is another benefit that can be gained through proper multi time frame analysis.
Exploring the Different Time Frames
Understanding the importance of using a multi time frame approach and the proper way to utilize it, the natural question becomes “What are the actual time frames that I should be looking at?” There is no one right answer to that question. The truth is, it will vary greatly based on your trading style and price targets. First you have to define your trading time frame, and from there you could extrapolate your next higher and lower timeframe. For the purpose of this trading guide and the day trading trading strategies mentioned within this guide, you should be observing the 1-day chart first, then the 1-hour chart, and lastly the 15-minute chart. To make this easier for you, I’m going to break down the different time frames and their importance in my overall trading.
The daily chart is extremely important in my overall decision process. I will not take a trading position without first doing thorough technical analysis on the daily chart. I typically plot horizontal support and resistance zones, supply and demand zones, and perform relevant trend line and pattern analysis on the daily chart.
Even though my setup time frame is the 1-hour chart, I consider the daily time frame to be the most important for my trade analysis because this is where the big/institutional money is. I want to make sure I am positioned on the side of the big players and institutional order flows that are capable of moving prices.
I will typically use the 1-hour chart in two ways. When I’m done analyzing the daily chart and I have formed a strong bias on a particular currency pair, I will zoom down to the 1-hour chart. From there, I make an assessment to see if there are potential setups emerging that I could trade in line with my daily chart analysis.
The second way I utilize the 1-hour chart is by independently analyzing the pairs on this time frame and scanning for high probability trade setups. When I find a setup that looks promising, I would then consult the daily time frame to make sure that I am NOT:
- Trading against a major trend on the daily.
- Trading right into a daily support and resistance zone.
- Trading against a divergence formation on the daily.
By using this 3 step filter, I find that I am able to weed out many of the lower probability trades.
This is my execution time frame. Once I have the go-ahead from my 1-hour and daily charts, I zoom down to the 15-minute chart in order to get the best trade execution. This is because I am able to see the emerging price action patterns in greater detail. If I am looking for a breakout, I will analyze important price swings that I feel, if broken, will begin to propel price.
Improving Entries and Exits
When I talk about multi time frame analysis with traders, most seem to be able to grasp the importance of using the next higher timeframe to get a big picture view. However, many traders seem to stop there and forget to zoom down to the next lower timeframe in order to optimize their entries.
As you may know or will soon come to realize, in order to be a consistently profitable trader, you must take advantage of every edge that’s available. By ignoring optimal trade execution methods, you are leaving money on the table. To realize the best trade entry time, you should zoom into the next lower time frame and execute from there.
When I am planning a trade, I want the best possible trade execution, and I will routinely execute off the 15-minute chart. I almost always use “conditional market” orders, because I would rather get in on a trade at a cheap price than end up missing a great entry price.
This is a crucial concept to understand. Most traders, on the other hand, typically take the opposite stance. They will chase a trade until they are filled regardless of how far the price has moved away from their anticipated entry point.
I am not as adamant about executing from the lower timeframe when planning to exit a trade. In fact, most times, I will set my stop loss and take profit orders the very moment that I enter a trade. The stop loss could be off either the 1- hour or 15-minute chart. I much prefer to do all my analysis prior to the trade execution, and then letting the market do what it will.
There is no need to stress about a trade once it is live. The price of the crypto currency pair will either hit my stop loss for a small loss or hit my take profit for a nice profit. I have found that this type of passive trade management works best for me and reduces the overall stress and emotion in my trading. Sooner or later, you will realize that the moment that you are in a trade, all your biases will come into play and haunt you during your trade management. It is one of the most difficult aspects of trading, and each trader will have to work on an approach most suited to them.
Written by: Edward Gonzales
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