Most technical traders in the foreign exchange market, whether they are beginners or experienced professionals, are faced with the concept of multi-time frame analysis while receiving market education. However, this fact-based means of reading charts and developing strategies is often the basis of analysis, which the trader subsequently forgets in the pursuit of profit in the market.
Specializing in intraday trading, momentum trading, breakout trading or news trading, along with other strategies, many market participants overlook the presence of a large trend in the market, miss clear support and resistance levels and do not notice a possible entry point and stop levels. In this article, we will look at multi-time frame analysis, how to choose a timeframe, and how to compare the information obtained together. (For more information, see Multi-time frame Analysis for profit multiplication.)
Multi-time frame analysis includes tracking the movement of the same currency pair on different timeframes. Despite the absence of any real restrictions on how many timeframes you need to track or which specific timeframe you should choose, there are general recommendations that most market participants follow.
As a rule, to get broad information about the market, it is enough to use three different periods – a smaller number of timeframes can lead to significant data loss, and using a larger number of them is usually unnecessary. When choosing three timeframes, you must follow a simple "rule of four". This means that, first of all, it is necessary to determine the medium-term period, and it should be a standard for how long an average transaction should be kept open. Based on this, you should also choose a shorter timeframe, and it should be at least one-fourth of the intermediate period (for example, if a 60-minute chart is a medium-term or intermediate chart, then a 15-minute chart should be chosen as a short-term period). To determine the long-term timeframe, we use the same calculation: it must exceed the medium-term timeframe by at least four times (for example, for the previous medium-term period, the long-term time period will be a 240-minute (four-hour) period).
It is extremely important to choose the right timeframe when choosing a spectrum of three periods. It is obvious that a trader who holds an open position for several months almost does not use a combination consisting of 15-minute, 60-minute and 240-minute charts. At the same time, an intraday trader who holds positions for an hour and rarely for more than one day is unlikely to use daily, weekly and monthly charts in his strategy. This does not mean that traders opening long-term positions will not need to track the movement of a currency pair on a 240-minute chart, or a trader trading on short-term timeframes will not need a daily chart, but they should choose adequate time periods rather than track the entire time range.
Types of timeframes
Long-term timeframe
Medium-term timeframe
Short-term timeframe
Using all timeframes together
Using all three timeframes in combination allows the trader to evaluate the movement of this currency pair, which will easily improve his chances of success in trading, regardless of other rules applied in his strategy. Performing a downward analysis contributes to trading in the direction of the main trend. This in itself reduces the risk, since there is a higher probability that the price behavior will eventually continue in the direction of the main trend. Applying this theory, the level of confidence in trading should be measured according to the alignment of time periods. For example, if the main trend is upward, but the medium-and short-term trends are downward, then a short position should be opened with caution, setting reasonable profit goals and stops. In addition, the trader can wait until the bearish wave runs out on lower timeframes, and then look for a good entry point for a long position when all three time periods do not show an uptrend.
Another obvious advantage of multi-time frame analysis is the ability to determine support and resistance levels, as well as strong levels for entering and exiting the market. The chance of successful trading increases when a trader uses a short-term timeframe in order to avoid bad entry points, as well as incorrect placement of stop loss or take profit levels.