Introduction – What’s Technical Analysis Using Multiple Time Frames?
Technical analysis using multiple time frames is a trend trading strategy in which the trader combines a short-term time frame, a medium-term time frame and a long-term time frame to produce the true trend of the asset and trade along the direction of the trend. In other words, the trader searches these time frames to spot areas where the short-term and medium-term time frames align with the trend on the long-term time frame. The entry for the trade is then executed on the short-term time frame.
The AG Markets MT4 platform is loaded with several time frames. The time frames start from 1-minute time frame and you can get up to the monthly time frame. In between we have M5, M15, M30, H1, H4, Daily and Weekly time frames.
The essence of multiple time frame analysis is to set a trade on the lowest time frame in a direction which is in tandem with the long-term trend of the asset. This will ensure that the trader does not go against the trend when setting a trade.
The Different Time Frames
The long-term positions seen on the daily, weekly and monthly time frames are typically set by long-term position traders with high net-worth. Some of these positions are held for years. These positions are typically not held by the man on the street with just a few hundred bucks to his trading name. These positions are held by the big dogs whose money rules the market. The small traders are usually in trades for a short time. Now since you are mostly likely going to be using the AG Markets MT4 platform, you will definitely not be in a position for years. Your money is best served in shorter trades so you can have a faster turnaround time. Even the big dogs reserve some of their capital for quick entry/exit high frequency trading.
So, if you have to trade a short-term position such as going long on a currency pair with a trade turnaround time of 30 minutes maximum, you need to be sure that the trend assumed by position traders on the long-term time frame charts is actually an uptrend and not merely an upside retracement of a downtrend.
Multiple Time Frame Analysis
Multiple time frame analysis does not place excessive emphasis on one time frame. You will use the long-term time frame to determine the trend of the asset, but the single candle that forms the price information for a day’s worth of trading on a D1 chart will not tell you where to set the trade, and will probably not tell you what technical entry will mirror the trend. This is where the short-term time frames come in. They can show a trader whether there is a technical basis to enter a trade in the direction shown by the long-term charts.
Let us illustrate multiple time frame analysis with a simple example.
Pick an asset to trade and open the Daily chart (D1). From the D1 chart below, gold is in a downtrend. Therefore, the objective here is to initiate a short trade. The day is November 11, 2015. All we see on that day is a very thin doji, which is not enough to make any trade decision.
Daily chart (Gold)
Move down to the 4-hourly chart to get a broader view of what is happening on the day in question. The H4 chart shows that the asset is in a downtrend, which confirms that the market is behaving according to the dictates of the trend seen on the D1 chart.
At this point, there is still not enough information to make a trade decision. So, the trader has to add the H1 chart to see if some more information can be obtained about where and how to make the trade entry.
Bingo! The H1 chart is loaded with a daily pivot indicator, which shows the pivot points for the day automatically. Here we see that the price action started the day with a mild upside move which was rejected at the R1 pivot, resulting in the formation of several doji and pinbar candles. The last of the pinbars closed below the R1, so a short trade would be the best option here, with target set to the daily pivot which is the nearest support. It took about 4 candles to get there (4 hours in length). The daily pivot was broken two candles later, and a Sell Limit entry which allows for a brief upside pullback to the daily pivot would be the most logical entry, with target at S1.