“Half of the truth is not the truth”. In investment trading, to have a more comprehensive view of what is happening in the market, investors often analyze and combine multiple time frames. Don’t miss the following article, I will share all the secrets behind this success. Let’s go!
What is Multiple Time Frames Analysis?
Multi-timeframe analysis is a multi-dimensional analysis method, instead of focusing on just one time frame (e.g. 1-hour chart), we will observe the same currency pair on many different time frames (e.g. 1-hour, 4-hour, daily, weekly).
Multi-timeframe analysis helps you understand the big market trend, entry points with a higher probability of success and avoid wrong trading decisions.
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Advantages of Multiple Time Frames Analysis
- By comparing different time frames, we can identify the overall market trend and avoid false signals.
- Multi-time frame analysis helps us find entry points with a higher probability of success.
- By identifying support and resistance levels across multiple time frames, we can place stop-loss and take-profit orders appropriately.
For example, let’s say you are analyzing the EUR/USD pair.
- The daily time frame shows the overall market trend.
- The 4-hour time frame shows minor corrections within the overall trend.
- The 1-hour time frame shows short-term trading opportunities.
By comparing these time frames, you can determine that the overall trend of EUR/USD is up.
When the price breaks a resistance level on the 4-hour time frame and is confirmed by a buy signal on the 1-hour time frame, you can open a buy order.
Place a stop loss order below the nearest support level on the 4-hour timeframe.
Types of Multiple Time Frames Analysis
To suit the needs of traders, multiple time frame analysis is divided into 3 main types:
Long-term time frame analysis
When analyzing a long-term time frame, we are looking at the big picture of the market. Just like looking up at the sky on a cloudless night, we can clearly see the stars and constellations. This helps us determine the general direction of the market over a long period of time.
Mid-term time frame analysis
Mid-term time frame analysis is like zooming out to see the big picture. Instead of focusing on small fluctuations during the day or week, we will observe the general trend of the market over the past few months. This helps us have a more comprehensive view of the market and make better trading decisions.
For example, let’s say you are trading the EUR/USD pair and you observe that the mid-term chart (e.g. monthly chart) is showing an uptrend. This means that in the long term, the EUR/USD price tends to increase. If you have opened a long position on EUR/USD, you can confidently hold this position because the overall trend is in your favor.
Short-term analysis
When we talk about short-term analysis, we are interested in smaller price movements that occur over a short period of time such as a few minutes, a few hours or during the day.
Short-term price movements are suitable for traders who want to trade frequently and profit from small price movements, allowing traders to quickly react to the latest news and market events.
Commonly used short-term time frames:
- 1-minute chart: Provides the most detailed information about even the smallest price movements.
- 5-minute chart: Allows you to track short-term trends and identify potential entry points.
- 15-minute chart: Provides a better overview of the market and helps you identify important support and resistance levels.
Example of Multiple Time frames Analysis
Let’s say you’re interested in the USD/EUR currency pair. To make smart trading decisions, you need to look at the market from multiple perspectives.
- Long-term timeframe (e.g. monthly): When you look at the USD/EUR monthly chart, you’ll see the overall trend of the pair over a long period of time. For example, you might notice that since the beginning of 2020, the USD/EUR price has been on an upward trend, with only a few minor corrections. This indicates a sustained uptrend and can be the basis for you to build a long-term investment strategy.
Mid-term timeframe (e.g. weekly): When you look at the weekly chart, you’ll see the shorter-term fluctuations of the USD/EUR price. For example, you might notice that the USD/EUR price has been moving up and down in the first half of 2021. This indicates that the market is in an accumulation phase and may be preparing for a strong breakout or correction.
- Short-term timeframe (e.g. daily): When you look at the daily chart, you will see very small fluctuations in the USD/EUR price over a short period of time. For example, you may notice that in January 2021, the USD/EUR price has been trending down. This could be a signal that the demand for USD is decreasing and you may consider selling USD to make a profit.
How to Trade Multiple Time Frames
To make an accurate decision, we need to have an overview of the market. Here are the steps to apply a variety of time frames to see the overall picture of the market:
Steps to take:
- Start from a large time frame:
Weekly chart: Shows you the general trend of the market.
Daily chart: Shows you small corrections within the larger trend.
- Narrow down to smaller time frames:
- 4-hour chart: This is a simple way to choose 3 suitable time frames.
For example: If you are a swing trader (holding positions overnight), you can use time frames like 4-hour, daily and weekly. And if you are a scalper (holding positions for a short period of time), you can use time frames like 1 minute, 5 minutes and 15 minutes.
- 1-hour chart: Shows you short-term trading opportunities.
For example, if you see on the weekly chart that the EUR/USD pair is in an uptrend, you can look for buy points on the daily and 4-hour charts. When the price breaks a resistance level on the 4-hour chart and is confirmed by a buy signal on the 1-hour chart, you can open a buy order.
Conclusion
In conclusion, each time frame will reflect different market conditions. Combining information from multiple time frames helps us have an overview of the market and make the right investment and trading decisions. And remember not to be subjective but always persevere in learning knowledge about the market.
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