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Don't Use Multiple Time Frame Analysis without Proper Chart Time Frame Alignment

Don't Use Multiple Time Frame Analysis without Proper Chart Time Frame Alignment

2012-05-02 03:00:00
Richard Krivo, Trading Instructor
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Many traders will employ some aspect of Multiple Time Frame Analysis in their trading.

A question that comes up quite frequently regarding MTFA is how far apart the time frames should be from one another. Here is an example of a question on this topic from a recent webinar: “If I use the Daily, 4 hour and 1 hour charts, could I then move down to the 5 minute chart for a scalp?”

While Multiple Time Frame Analysis can be used in a wide variety of trading strategies from shorter term to longer term, it is important to be sure that the “spacing” of the chart time frames relate to each other.

For example, while using the Daily chart to determine the trend on a pair and then executing the trade from the 4 hour or the 1 hour chart, makes sense, throwing a 5 minute chart into that mix is simply too much of a disconnect from the other time frames.

The Daily and the 4 hour frames of reference are simply too far removed from a 5 minute frame of reference. For example, there are 288 individual 5 minute time periods in a 24 hour period. So we would be looking at a day’s worth of trading data and trying to carve out 1/288th of that time period to determine our entry. The 1 hour is closer to our objective but even then some might argue that it still is a bit removed for our purposes.

Ideally you want to achieve a balance so that the time frames of the charts are neither too close nor too far apart from one another. We want them to be close enough so that one time frame does have an impact on the others being used, yet not so close that each time frame is a virtual clone of the others.

For example, a Monthly, 6 hour, 5 minute chart array would simply have too much separation and none of those time frames really have any direct impact on the other. At the opposite extreme, a 30 minute, 29 minute, 28 minute chart array would not be of any value either since each of the charts is a virtual duplicate of the other. Consequently, the whole purpose of MTFA would be lost.

What we teach is to space the time frames using roughly a 4:1 or 6:1 ratio. Notice how this Daily, 4 hour, 1 hour scenario breaks down: a 4 hour chart is 1/6th of a Daily chart and 1 hour chart is 1/4th of a 4 hour chart.

So in the case of scalping off of a 5 minute chart, I would consider checking a 30 minute chart for the direction to trade the pair. In fact, one of my colleagues, Walker England, has a scalping strategy that looks to the 30 minute chart for trend and uses a 1 minute or a 5 minute chart for timing the entry.

By following the above ratios, or something relatively close to them, you will insure that your charts are not too close or too far from each other for purposes of logical Multiple Time Frame Analysis results.

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