Multiple Time Frame Analysis

7 min read
HubertM

HubertM

Author

Dear Traders,

‘Which time frame should one trade for best results’ is a common question for new traders. Becoming skilled at multiple time frame analysis is an essential skill in order to optimize trading performance.

This article will discuss the ins and out of chart time frames and how to analyse them.

Making sense of the chart information we get from multiple time frames is daunting initially. That’s because the same chart looks totally different on large and small time frames. Unless we have the ability to connect the information we get from each time frame into one cohesive picture, it can become very confusing. So although it is initially tempting to try and simplify trading by trying to single out one time frame that is ‘best’ for trading, you will probably discover eventually that the best results are achieved via multiple time frame analysis.

Different time frames gives us different degrees of granularity on a given market. That means we are always looking at the same information, only with varying degrees of detail. It is therefore much better not to see different time frames as separate from each other, but as one and the same structure.

So how do we makes sense of this multi-layered information? Here are some key points to get you started:

Time Frame Hierarchy

The structure of larger time frames always govern the structure of smaller time frames. This point is easy to understand when you consider that a daily candle contains so much more market information than a 15 minute candle. In other words, a daily candle will reflect the decisions of a vast number of market participants when compared to a 15 minute candle. So whatever happens on the bigger scale will set the stage and scope of what price is able to do on smaller time frames. It’s easy to suffer unnecessary losses if we follow a trend on a smaller time frame while being unaware of these larger structures. For example a support/resistance level from the weekly chart will very likely create a significant pause in price movement that could last for many days or even cause a reversal on smaller time frames.

It is therefore always best to begin your analysis on a larger scale. Look at the weekly and daily charts, zoom right out and draw any significant horizontal r/s levels and trend lines that you can spot. Keep these lines on the chart because historical levels will pretty much always remain relevant, even if they get broken. Mapping out these levels has the obvious benefit of highlighting zones where price may significantly stall or reverse, and will help you avoid trading into a brick wall on smaller time frames. Likewise, it will also give you an indication of how much space there left for a small-scale trend to stretch into before encountering more serious resistance.

Price Movements are Fractal in Nature

This means that similar price patterns recur on all time scales. So for example one large trend structure on the daily chart will contain many micro-trends and micro-reversals within it. A small retracement in the daily chart will appear as a reversal on a 15 minute chart for example. So the clearer you are about the bigger structures, the better you will be able to gauge the scale and duration of the swings on smaller time frames, which has huge potential for maximising trade entries and exits.

As a bigger trend structure approaches its end, the price behaviour on smaller time frames will start to show this by a progressive slowdown of movement.

This is where moving averages (MAs) become extremely useful because they provide us with an average price value to which price will always correct back to eventually. When a trend is strong, price will be far away from the moving averages, and when a trend begins to slow it will return to the moving averages and potentially even break through them. This return to the moving averages will occur on different time frames in a progressive manner. So for example when a daily chart trend is starting to show the first signs of slow down, price may still be away from its moving averages, but the 4 hour chart will already reveal a retest of its MAs. On smaller times frames yet, price will have broken through the MAs.

The images below show a section of the EUR/USD uptrend from the daily, 4 hour, and 15 min chart perspective and provide an example of how price relates differently to its MA on different time frames. The two black lines mark the same zone in each chart. The MA that is shown in the charts is the 144 EMA. Note how price is still far away from the 144 EMA on the daily chart, but already testing (and eventually breaking) the 144 EMA of the 4hour chart. The 15 minute chart has not just broken through the 144 EMA but price has pretty much established a range already.

 

 

By checking price vs MAs on multiple time frames, and combining this with key r/s levels, you will able to gauge the scale of the correction better. If price hasn’t tested the MAs of the daily chart for a long time because the trend was strong, you can be fairly certain that it won’t just break through them at the first attempt. They will more likely act as a bouncing spot. Knowing this will be enable you to evaluate potential counter trend setups on smaller time frames and know when to pull out again.

The smaller time frames will also provide the earliest signals once price approaches a bounce zone (e.g. a convergence of the daily chart  MA’s and a key r/s level), which could act as a trigger for continuation of the bigger trend. So if you are clear about the bigger structure, you can rely more safely on bounce reactions of smaller time frames, which will also give you potentially better trade entry prices compared to waiting for a continuation signal to form on a larger time frame.

All the best along your trading journey

Hubert

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