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Multi-Time Frame Analysis: An Introductory Overview

A GUIDE TO MULTI-TIME FRAME ANALYSIS

Multi-time frame analysis, sometimes referred to as multiple time frame analysis enables traders to concentrate on the timing of transactions and may assist in determining when trends may be nearing their conclusion. This article will describe applying this concept to the EUR/AUD currency pair.

MULTI-TIMEFRAME ANALYSIS BENEFITS

Pitchforks and median lines are used to identify important price response zones. These ideas may be extended to other time intervals to provide a more comprehensive picture of current market patterns.

The objective is to “see the forest through the trees,” or, in other words, to always have a more comprehensive understanding of where the market is about trends before initiating a trade based on a particular setup. We can find potential entry opportunities inside a particular price increase or decrease and aid in timing these movements by looking at price behavior in different periods.

Daily EURAUD

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Source: DailyFX

Take a look at the above daily EURAUD chart. A descending channel formation that highlighted support into the April lows at 1.3678 was present in the pair’s trading, which was clearly in a downturn from the 2015 highs. The intersection of trendlines with significant price highs and lows will often signify more prominent places of support and resistance, as was covered in prior lectures. The attention now moves to the near-term picture to clarify how we would trade this potential comeback. In this case, the price is challenging down-trend support.


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Source: DailyFX

Price being at a support level does not automatically guarantee it will hold. Before considering trading against the larger trend, prices must demonstrate some behavioral shift. A near-term descending channel formation buried in the 4-hour chart may be seen if we zoom in (red). As the price moves away from significant support, a break over channel resistance would shift the pair’s near-term emphasis upward and act as our “trigger” to enter a trade.

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Source: DailyFX

We may create an upslope using the most recent low-high-low and ascending pitchfork formation to pinpoint our topside objectives. With a concentration on the topside and above the lower median-line parallel, the first aim of such a trade would be at the pattern’s median line (bisector).

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Source: DailyFX

Several weeks later, the pair had crossed over the down-channel resistance and had returned to test it as support (long-entry). Following a break and rally into the upper median-line parallel a few days later, the advance continued into the median line. This example demonstrates how looking at price movement through different time lenses may help spot trade opportunities within the framework of a bigger trend (also called a primary trend). These patterns often include secondary (or even tertiary) trends that provide short-term setups for trading against the primary trend.

KEY TAKEAWAYS FROM MULTI-TIMEFRAME ANALYSIS

Some significant considerations while using multi-timeframe analysis:

  • A surplus of time frames is worthless. Some people attempt to time entrance and leave when all the time frames coincide with a signal, but this seldom happens.
  • Use a ratio of 1:4 to 1:6 between the trigger and trend periods when reducing the number of timeframes. For instance, look at the daily chart for trend analysis if you are trading off the four-hour chart. Look at the four-hour for trend analysis if you’re searching for a trade-off from the one-hour.
  • Recognize when you are trading against the trend – The near-term outlook often provides settings that go counter to the primary trend, as in the case of the EURAUD example above. It’s crucial to handle these trades cautiously, which entails using less leverage and prudent stop losses.

With the use of multi-timeframe research, traders can concentrate on picking the right moment to place trades and may also determine when a trend may be nearing its conclusion. No efforts would have been made on the long side in the previous example if the EURAUD had remained within the boundaries of creating a near-term falling channel. In the same vein, we may have missed the turn if we hadn’t seen the trade in the context of the larger trend indicated on the daily chart. Always trade within the context of the primary trend while keeping this in mind, and watch for short-term price action to provide time and price triggers.

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