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Multiple Time Frame Analysis

By Richard Krivo, Trading Instructor
23 November 2011 23:47 GMT

Last night in our LIVE Webinar in the Trading Room, we discussed the concept of Multiple Time Frame Analysis.

For those of you who may have missed it or were unaware of it (more on how you can become a participant in the Trading Room later), below is a synopsis of the concept and of how it can be utilized in your trading.

Many traders will do their trade analysis based on a single chart. In my opinion, traders who do that will have a very one-dimensional understanding of this pair. Permit me to create an analogy…

Let’s say that you get to know someone through your job and you form an opinion on what that person must be like based on this single aspect of their life. Your analysis may well be very accurate. However, this person could likely have a very different personality relative to other aspects of their life. To really get to know and understand this person it would be beneficial to see them outside of the confines of the office. The same is true with a currency pair…

Getting to “know” a currency pair in a single time frame is only part of the picture. What the pair looks like on a Daily chart may be quite different from what it looks like on a one hour chart for example. That being said, a much more in depth analysis can be had when looking at a pair move through several time frames.

Since a currency pair is moving across numerous chart time frames simultaneously, Daily, 4 hour and 1 hour for example, it is beneficial for a trader to wait to enter a trade until the smaller time frames in the analysis are in agreement with the larger time frame. Trading in the direction of the longer term trends will insure that we enter trades with a higher probability of success.

The whole process regarding trading in general and Multiple Timeframe Analysis (MTFA) specifically begins by identifying the trend…the direction in which the market has been moving the pair over time. For our purposes here, the trend can be identified on the Daily chart.

Taking a look below at a historical Daily chart of the EURUSD, we can see that the pair has broken through trendline support and has been posting lower highs and lower lows. Also, Slow Stochastics is below 20 with the faster K line below the slower D line…both of those are bearish signs. Based on this, we know that we only want to sell the pair.

Multiple_Time_Frame_Analysis._body_Chart_5_26_11_1.png, Multiple Time Frame Analysis

So now that we know the direction we want to trade the pair, we go down to a lower time frame to “fine tune” the entry. The 4 hour chart on the EURUSD below shows how the pair moved to the upside (retraced) and now is poised, potentially, to move back to the downside in the direction of the trend we identified on the Daily chart. Using Slow Stochastics to identify when downside (bearish) momentum takes hold, we would enter when both the K and the D line of Slow Stochastics cross below 80.

Multiple_Time_Frame_Analysis._body_chart_5_26_11_2.png, Multiple Time Frame Analysis

Since the 4 hour chart is providing what I consider an optimum entry signal, I would not refine the entry further by consulting the 1 hour chart. (If the 4 hour chart was giving mixed messages, however, I would drill down to the 1 hour to see if the entry could be further optimized.)

In a nutshell, to implement MTFA in our trading, after we establish the trend, we want to check several lower time frame charts and not enter the trade until they are in agreement with the longer term chart that we used to determine the trend. Once the time frames are in agreement, it is like aligning the tumblers in a lock so the lock may freely open.

Below is a visual that may assist in understanding the concept…

Multiple_Time_Frame_Analysis._body_MLTA_Cycle_Arrows.png, Multiple Time Frame Analysis

Regardless of your trading style, scalper, swing or position trader, MTFA can be a part of your trade analysis.

Notice on the diagram above that the examples are labeled Short Term, Mid-Term and Long Term. Since I am more of a longer term Swing Trader I use the Daily chart for the long term, a 4 hour for the Mid and a 1 hour for the Short Term. An ultra short term trader however may choose the 1 hour chart for the long term, the 30 minute for the Mid and a 5 minute for the short. MTFA can be tailored to your specific trading style.

Here is how to join us for the Webinars in our LIVE Trading Room…

If you have a live trading account with FXCM you can attend any of the live Trading Room sessions by clicking on the link below…

https://plus.dailyfx.com/tnews/liveclassroom.do

Use your live account username and password to gain access…

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23 November 2011 23:47 GMT