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Unlocking the Secrets of Multiple Time Frame Analysis

Saturday, 28 April 2012 03:00 GMT

by  Richard Krivo, Trading Instructor

Have you ever entered a trade in the direction of the longer term trend only to be stopped out in fairly short order? If that has happened to you, it may have been because in the shorter term, the pair was retracing…moving against the longer term trend. To learn how to “align the charts” so that the shorter term are moving in the same direction as the longer term at the time of the entry, read on…

Most traders find themselves analyzing a currency pair for trading purposes on a single time frame. While that is all well and good, a much more in depth analysis can be accomplished by consulting several time frames on the same pair. Think of it as trying to “size up” a person based on meeting them on one occasion versus meeting them several times. You will have more insight regarding both the person and the trade if you view them from more than one vantage point.

Since a currency pair is moving through multiple time frames at the same time, it is beneficial for a trader to examine several of those time frames to determine where the pair is in it “trading cycle” on each time frame. Ideally a trader will want to postpone their entry until momentum in each time frame is aligned…all bullish for an uptrend or all bearish for a downtrend.

The entire 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 currency pair in question over time. For our purposes here, the trend can be identified on the Daily chart.

On the Daily chart of the GBPUSD pair below, we can see that the pair has been in an uptrend since mid-January. The pair has been trading above the 200 SMA (green line) and pulling away from it. Price has also been building higher highs and higher lows, and, at the time of this chart the GBP is strong and USD is weak.

Unlocking_the_Secrets_of_Multiple_Time_Frame_Analysis_body_gbpusd_mtfa_4_24_1.png, Unlocking the Secrets of Multiple Time Frame Analysis

Also, when we look at Slow Stochastics, we can see that the indicator is giving us a very bullish look in that the two moving averages which comprise Stochastics are at a strong upward angle and the separation between them is increasing meaning momentum is becoming stronger.

All this adds up to bullish (upside) momentum. This means that we only want to buy the pair when each time frame is reflecting that same bullish momentum.

So now that we know the direction that we want to trade the pair, let’s check out the lower time frame charts to see how they line up with the Daily so we can “fine tune” our entry.

In looking at the 4 hour chart we see that the uptrend is present here as well after a mild retracement. Stochastics reflects the pullback that took place but is still poised to crossover to the upside should bullish momentum ensue.

Unlocking_the_Secrets_of_Multiple_Time_Frame_Analysis_body_gbpusd_mtfa_4_24_2.png, Unlocking the Secrets of Multiple Time Frame Analysis

We can now check out our one hour chart for our entry signal…

Unlocking_the_Secrets_of_Multiple_Time_Frame_Analysis_body_gbpusd_mtfa_4_24_3.png, Unlocking the Secrets of Multiple Time Frame Analysis

The one hour chart provides us with our optimum entry signal. Notice how Stochastics has retraced, moved below 20 and then crossed over to the upside and continued to move above the 20 line.

That crossover in the red circle would be our entry signal since that is the point when bullish momentum kicks back in on the one hour chart. When that bullish crossover takes place, the one hour time frame is now aligned with both the four hour and the Daily chart. They are all moving in the same direction at the same time and our Multiple Time Frame Analysis objective is accomplished.

While MTFA will not guarantee a winning trade, by employing it in our analysis we are putting another trading “edge” in our favor and increasing the likelihood that we will have a successful trade.

Bottom Line: To implement Multiple Time Frame Analysis, after we establish the trend, we want to check a couple of lower time frame charts and not enter the trade until they are in agreement with the longer time frame chart that we used to establish the trend. Once they are all in agreement, we enter the trade. It is like aligning the tumblers in a lock. Once that is accomplished, the lock will open freely.

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