Many market participants miss the larger trend, miss clear support and resistance levels, and miss entry and stop levels because they don’t look at the higher time frames.
Multiple Time Frame Analysis
Multi time frame analysis involves monitoring the same currency pair on different time frames.
As a rule of thumb, using three different timeframes gives a fairly broad view of the market, while using less can result in significant data loss, and using more frequently provides excessive analysis.
When choosing three time frames, a simple strategy could be to follow the “rule of four”. This means that you must first determine the medium-term period in which the trader is going to trade. From here, a shorter time frame should be chosen, which should be at least a quarter of the intervening period. Using the same calculation, the long-term term must be at least four times larger than the intermediate term.
In the long term, it will determine the current trend, in the short term, the ideal entry point, and in the medium term, it will indicate how long you can hold the position and where the targets are.
When choosing a three period range, be sure to select the correct time frame.
A long-term trader does not need to follow a minute chart, and a short-term trader does not need to follow a monthly chart.
With this method of studying charts, it is generally best to start with long-term time frames and move on to more detailed frequencies. Looking at the long-term time frame, a dominant trend is established.
Long-term price movement is influenced by fundamental data that a long-term trader must take into account in the analysis.
It is important to consider interest rates, which are a major component in the pricing of foreign exchange rates.
Medium term terms
This is the most versatile of the three because at this level one can get an idea of the short and long term time frames. In fact, this level should be the most used chart when planning a trade when a trade is active and when a position is approaching its target profit or stop loss.
short term time frame
As the smaller swings of price action become clearer, the trader is better able to choose an attractive entry for a position whose direction is already determined by the higher frequency charts.
Another consideration for this period is that fundamentals again have a strong influence on price movement on these charts, albeit in a very different way than on the higher time frames. Fundamental trends are no longer visible when charts are below the four-hour frequency. Instead, short-term time frames will react with greater volatility to news. These jerky movements often last for a very short time and as such are sometimes described as noise.
putting it all together
When all three timeframes are combined to evaluate a currency pair, a trader will easily increase a trade’s chances of success, regardless of other rules applied to the strategy. Performing a downside analysis helps to trade with the trend. This alone reduces risk as there is a higher chance that the price action will eventually continue in the direction of the longer trend. Applying this theory, the level of confidence in a trade should be measured by how well the time frames match up.
For example, if the larger trend is up and the medium and short-term trends are moving down, cautious short positions should be entered with reasonable profit targets and limits. Alternatively, a trader can wait until the wave bearish finish on the smaller charts and try to go long at a good level when all three time frames line up again.
Another obvious benefit of including multiple time frames in trading analysis is the ability to identify support and resistance values, as well as strong entry and exit levels. The chances of a successful trade are increased when trailing on a short-term chart due to the trader’s ability to avoid incorrect entry prices, misplaced stops, and/or unreasonable targets.
Using multiple time frame analysis can greatly increase the chances of a successful trade. Unfortunately, many traders ignore the usefulness of this method when they start trading. As we have shown in this article, it may be time for many novice traders to return to this method, because it is the easiest way to know the direction of the trend and not go against it.