Multiple Time Frame Trading
Analysis
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Multiple time frame trading involves using more than one time frame to analyze
and then carry out your trades.
The reason that using multiple time frames is so popular when using technical
analysis and price action trading is that it gives you a clearer overall picture of what
price is doing. It also helps you drill down to a smaller time frame to make a better
entry with a smaller stop loss.
This post goes through exactly what multiple time frame trading is and how you
can start using it in your own trading.
What is Multiple Time Frame Trading?
When multiple time frame trading, you are using more than one time frame to
analyze an asset's price. For example, if trading the EURUSD, you may be looking at
the daily chart, the 4 hour chart, and also the 30 minute chart.
You would use multiple time frames to analyze a trade because it can give you an
excellent idea of what price is doing overall. Each time frame has its own trends and
movements.
The higher the time frame, the stronger the price action and signals area. However,
also the slower price is moving. The shorter the time frame, the more noise and
false moves you will encounter.
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If you can combine multiple time frames, then you can start to gain a very clear
picture of exactly what the price action is doing.
Multiple Time Frame Trading Methodology
The methodology behind using multiple time frames is that you can start to build a
clearer picture of the price action and technical analysis story.
For example, you may find that the higher time frames, such as the daily chart, are
trending higher, so you begin looking for long trades. Whilst you could stay on the
daily time frame to make your trade, your entry will not be ideal, and your stop loss
will be wide.
You could use the information you have from the daily chart and start to move
lower through the time frames. You could use a smaller time frame such as the 30
minute chart to find the ideal long trade entry that gives you a tight stop loss and a
much bigger potential risk to reward ratio.
Multiple Time Frame Confluence
The main reason that so many traders use multiple time frames in their trading is
because it gives their trades a level of confluence.
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When trading with one time frame only, that is all the information you have. When
using multiple time frames, you start to build a really clear picture of the overall
price action story.
In the example below, we can see that the daily chart price is in a trend higher. We
can also see that price has pulled back lower into an important support level.
The second chart below shows the same pair; however, this is the 1 hour time
frame. We could use this smaller time frame to look for a better entry signal to go
long that would give us a tighter stop loss. In this example, the price has formed a
bullish engulfing bar at the daily support level inline with the daily chart trend.
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Trading 3 Time Frames
Most traders when analyzing their trades over multiple time frames will use three
time frames.
The reason for this is because you normally want a higher time frame, such as the
daily or weekly time frame that shows you the overall price action picture. You then
want an intraday time frame such as the 4 hour or 1 hour time frame that shows
you what has been happening on the intraday charts. And lastly, you want a smaller
time frame that will help you find the best trade entries. These time frames are
normally smaller time frames like the 30 minute and 15 minute time frames.
The higher time frame, such as the daily chart, will show you a clear picture if the
price is in a trend or ranging and will have fewer false signals. As you start to move
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to lower time frames, there will be more noise on your charts and many more false
signals.
If you can combine the higher time frames with the lower time frames, you can start
to get a really good idea of where the market is looking to head next. You can also
start to make tight entries.
Multi Time Frame Indicators
One of the letdowns of most trading platforms is that they do not allow for
indicators to be easily used across multiple platforms. For example, if you want to
see what a moving average is doing on the 1 hour chart, then you have to move to
the 1 hour chart.
When multiple time frame trading, it can be convenient to see what is going on with
other time frames without moving to them. For example, if analyzing a Forex pair
on the daily chart, it can be convenient to know what a certain moving average is
doing on the 1 hour chart without moving off the daily chart.
Whilst it is not built directly into their charts, MetaTrader allows you to install and
use some free custom indicators that will let you do exactly this. Some of the
popular ones are moving averages, RSI, and stochastic that can all be used when
multiple time frame trading.
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You can checkout some popular multiple time frame trading indicators here.
Strategy for Multiple Time Frame Trading
One of the best strategies when multiple time frame trading is to trade with the
higher time frame momentum and use the smaller time frames to pinpoint your
entries.
As an example, there are three charts of the same Forex pair below, the daily, 4
hour, and 30 minute chart.
In the first daily chart, we can see the price starting to break higher with the trend
and through an important resistance level.
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On the second chart that is the 4 hour time frame, we can see that price has
confirmed this breakout with two large bullish candles. This lets us know that we
should be looking for long trades with this new momentum.
On the smaller 30 minute chart, we are now looking for our trade entry. This
smaller time frame gives us a better entry with a smaller stop loss and a bigger
potential risk to reward level.
When price pulls back into a clear support level, we can make a long entry and
profit from the next move higher that is in line with the higher time frames trends.
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