Using multi-time frame analysis is a form of technical analysis used by trader's ton help understand price action of a currency pair. Starting on a larger time frame provides an understanding of longer-term trends and zooming into smaller time frames will help identify an ideal entry position.
No matter what form of trading style is being used, multi-time frame analysis is a useful process for days traders, scalper and swing traders alike. Understanding how current price action fits in with the longer-term trend is essential in minimising risk and increasing probability.
In This Article
- What Is A Time Frame
- What Is Multi-Time Frame Analysis
- Top Down Analysis Working Example
- Which Time Frames Should Be Analysed
- Summary
What Is A Time Frame
Before we go into detail about using multi-time frame analysis, it is important to fully understand what we are referring to when discussing time frames.
When undertaking technical analysis, it will be completed using a technical chart that displays price action provided by a broker's platform. Brokers will offer a range of types of price displays, but for the purposes of this article we will discuss using candlestick terminology as this is the most commonly used form of charting.
Candlesticks show key price points of a currency pair over a period of time, the period is determined by selecting the corresponding chart time frame. For example, a 15min chart will collate price information and display them in 15minute candles, each candle showing the opening and closing prices and highest and lowest prices, within that period.
The most commonly used time frames are:
Short Term Trading (Day Trading)
M1 - one minute
M5 - five minutes
M15 - fifteen minutes
M30 - thirty minutes
Medium Term Trading (Swing Trading)
H1 - one hour
H4 - four hours
D1 - one day
Long Term Trading (Position Trading)
W1 - one week
M1 - one month
What Is Multi-Time Frame Analysis
Multiple time frame analysis is the process of examining price movement of a currency pair over different time frames.
The most commonly used form of multi-time frame analysis is that of a top-down approach. This begins with looking at longer time frames, identifying the longer-term trend and where current price action fits within it. Once the longer-term trend has been plotted, a trader can zoom into a smaller time frame to undertake further technical analysis using charting tools, to spot the ideal entry point for the trade.
Best practice multi-time frame analysis is to use three time periods, this will provide a broad enough reading. Using more than three charts can result in redundant analysis and using fewer may mean that important data is overlooked.
It is important to understand that whichever charts are being used, they should be sequential in their time frames. If a trader is using a 1hr chart time frame for the longer outlook, the smaller charts should be 30min and 15min. This allows for easy analysis as each time frame can be easily seen within the longer-term picture. What should be avoided, as an example, is analysing a 1day chart for a longer-term position with the intention of trading on a 1min chart. The two-time frames do not easily trace as the small-time frame is so far removed from the longer-term trend and will be confused by short term market noise.
Top Down Analysis Working Example
Before placing a trade, it is important to get a clear understanding of where the current price point is in terms of the bigger picture, is it following the trend or is it near a key support or resistance point. Looking at a higher time frame allows a trader to understand the current pricing and trade potential with more clarity. Being able to assess how far the position may move before it feels pressure, means that it is possible to tailor the trade to comply with a trading strategy i.e., risk to reward and profit ratios.
Look at the chart below:
The above screenshot is of the 1hr chart for the EUR/USD currency pair. Looking at this chart in isolation it is clear that the sensible trade would be to take a long position following the upward trend. Using multi-time frame analysis, an experienced trader would double check this and zoom out and have a look at the 1day chart:
This tells a very different story. The EUR/USD has been in decline for many weeks and taking a long position would be going against the trend. The information highlighted in the 1hr chart is shown in the outline box. By focusing on one time frame only, the information available to you is very limited, and a trader can easily be drawn into placing a poorly researched trade.
When time frames are combined to evaluate a currency pair, a trader will improve the odds of success. Performing the top-down analysis encourages trading with the larger trend. This alone lowers risk as there is a higher probability that price action will eventually continue on the longer trend.
The top-down approach is useful when performing multi time frame analysis as the longer time frames have less market "noise", the charts are clearer, and trends and patterns are much easier to identify.
Which Time Frames Should Be Analysed
A common question asked by traders is which time frames should they be analysing. The answer is that it is completely dependent on the individual and their trading style. A good guide to which time frames should be used would be to have the middle time frame reflect the amount of time a position is likely to be held.
Scalpers - Traders that scalp are looking to capitalise on tiny currency fluctuations with high levels of leverage. A scalping strategy will be based on placing several trades a day over short periods of time and will use the smaller time frames like 1m, 5m or 15m. Using this strategy will often use indicators like the Relative Strength Index (RSI) that informs a trader when a trade is over sold or over bought by generating a measurement between zero and 100 and states that a currency pair is overbought when the index has a reading above 70, and it is oversold when it has a reading below 30.
Day Traders - Day trading generally involves identifying trade set ups on a 1hr chart and zoom into a smaller time frame such as 15m to spot the ideal entry point. Like scalpers they will use indicators like the RSI or Bollinger Bands that help to identify when a reversal or correction is due. Day traders as the name suggests will look to close all of their open positions at the end of the day.
Swing Traders - Using support and resistance as indicators on a 4hr chart a day trader will identify trades that are reaching a key price point where buying pressure is exceeded by selling pressure and vice versa. As positions will have been entered into using a midterm chart that is less susceptible to market noise, positions can remain open for many days before reaching their projected closing price.
Position Traders - Using the longer-term charts like W1 and M1 long terms traders will take a position that they expect to be open for many days or weeks and are generally based more on fundamental factors than relying on technical analysis alone.
Summary
Multi-time frame analysis is a simple but effective form of technical analysis that should be used to gain an understanding of where current price action sits in relation to longer term trends. Using multi-time frame analysis is good practice to lower high-risk trading and to determine realistic levels price movement by identifying key points of support and resistance and trend direction.
