Multiple Time-Frame Analysis

One of the reasons I prefer the Forex markets is because of the big moves that happen daily, as it moves $5 trillion every day. And since technical analysis applies across different markets, if i ever do decide to trade other markets again, I will have plenty of practice.

Today’s topic of discussion is, multiple time-frame analysis. First, I want to make sure everyone has a thorough understanding of japanese candlesticks. The same theory applies to bar charts but it seems to me that candlesticks are quite popular among traders so, I will focus on these.

Candlesticks are not only aesthetically appealing. A great deal of information is supplied within each candle.

Each candlestick is a fractal of time, displaying the opening and closing price of a particular asset, as well as, any price reached within a selected time period.

Therefore, if the selected is a one-minute chart then, every candlestick represents the price action of one minute. Likewise, on a monthly chart, every candlestick represents one month of price action. What is multiple time frame analysis? Investopedia, to the rescue!

Multiple time-frame analysis involves monitoring the same currency pair across different frequencies (or time compressions).

https://www.investopedia.com/articles/forex/08/multiple-timeframe.asp

We talked about “whipsaws” in the market, where price starts in one direction and swiftly reverses the other way, taking your money with it if you were in the trade. You probably think, “Someone is against me!”

Correct. Thousands of retail traders, big commercial banks, your broker, the federal reserve, and Satan.

‘Eve’ by Isobel Von Finklestein. Original photo retrieved from: https://www.pinterest.com/danadane77/not-today-satan-not-today

Where time frame analysis comes in is by helping to determine a directional bias, and possibly stop loss and profit target, within a specific amount of time that you are comfortable holding onto a position, and combining this with proper risk management to maintain profitability.

There are many long-term traders in the spot Forex market but that’s what futures contracts are for. Most traders are drawn to spot Forex in the pursuit of quick bucks. Failure to prepare; however, will only lead to gambling and not profit. So, a technique that can be used for capturing quick gains is analysing price on different time frames and pinpointing a perfect entry and exit. We already discussed the times we should be trading, when the market is most volatile and liquid, London and US open, specifically, during the overlapping period from 3-11 AM Eastern standard time.

Time-frame analysis can be implemented into your trading strategy in any manner but there are some fundamental guidelines that increase chances of profitability:

Rule of four

The purpose of this technique is to “zoom” in on the price action in one’s analysis; however, the rule of four exists to prevent over-analysing and end up being worse off than before applying the technique. As an example, if analysing a 4-hour chart, one should “zoom” in to 1-hour, and from there, a 15-minute chart.

The point is to skip one or more time frames because small steps will look so similar to the last chart that one’s analysis will be negatively impacted.

Top Down Approach

Consistently profitable traders recommend starting with the highest time frame when beginning time-frame analysis. Why? Because the overall projection of the market is more decisive on higher time frames.

If you’re used to my comical nature, hopefully you will not be offended by the following sexist (i guess is the word for it.. or we’ll just call it fucked up, for lack of a better word or fuck to give) analogy:

Imagine you are looking at pictures of potential dating partners on facebook. Pretty faces are quite attractive but.. “I bet he/she is fat,” you thought to yourself as you attempt to find a full body pic. Once found, you zoom in on the features to see if you can predict how fun a future date would be.

I apologize to those expecting more, or more than likely, expecting less shallow, unrelated, misogony.. (better? No time for thesaurus..) Like a true chauvonistic pig, start at the top then, work your way down where, it really matters. For females.. well, you’re used to making good decions, right (wife shakes head in disgust).

Jokes aside, notice how the candlesticks are often many times longer on higher time frames. Because, of course, the price is swinging back and forth for days or weeks at a time. It is much easier to ascertain directional bias by performing this way.

A Word on Bias

Beginning traders often get caught up on the idea of being right. This is not a problem, per se, but the only element that we can actually be right about is time. Why? Because markets move up, down, and sideways.. and within those movements, does the same thing, over and over. If you guess a certain number or price, within a given range over the course of, say, 10 years, you will undoubtedly be correct several times.

Time-frame analysis is just one of the tools that can be used to discern a directional bias and find the best entry points, stop losses, and profit targets. Just remember:

  • Bias goes both ways. A traders job is to determine what directional bias needs to be taken, in order to make a profit within a specified time period. Then, repeat this process while, managing risks that maintains and increases capital.
  • Use the rule of four to avoid information overload.
  • Always start with the highest time frame, using a top down approach.

The following table can be used as a reference point in deciding which time frames to use based on your trading style:

Screenshot retrieved from: https://www.dailyfx.com/education/time-frame-analysis/forex-trading-time-frames.html

In closing, a few more pics that show different time frames:

 


 

 

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