Remember the clichés “the trend is your friend”? Yes, I’m sure many of you traders out there have heard of this perhaps-the-oldest adage in trading. You see, one of the most important aspects of trading is really about identifying the trend which represents the mood of the market. Trading with the trend in your direction immensely reduces the risks you are exposed to and increases the chances of winning. I mean, think about it, if the market is bullish, a rational trader should almost certainly take a long position to take advantage of the uptrend.

Just as what many indicators, e.g. Moving Averages, MACD and RSI, traders employ aim to achieve, the concept of multiple time-frame analysis strives to give traders a broader view of the market trend such that traders may locate trading opportunities aligning with the overall trend of the market (buying opportunities in a bullish market and selling opportunities in a bearish market). It is thus an important technique in chart-reading but often neglected as traders move into more advanced techniques.

In essence, in the case of forex trading, multiple time-frame analysis requires a trader to study the pair of currencies on charts of different time frames before entering into a trade. For instance, a trader normally trading on a daily chart should not only consider the daily chart for the financial asset he is trading on, instead, he should also study charts of other time frames, such as weekly and monthly charts. Just what you probably often hear, the world of trading is full of flexibility, as such, there is no fixed rules on how many charts of different time frames should one choose to use. It really depends on an individual trader’s own trading preferences. However, there are some general guidelines that I have summarised which one may consider when it comes to using multiple time frames.

  • Use at least 3 different periods, e.g. 15-minute, 60-minute and 240-minute combination. This serves as a long-term, a medium-term and a short-term time frame.
  • Different time frames should be 4 times apart, e.g. 15-minute as a short-term time frame and 60-minute as a medium-term time frame.
  • Trade in the trend shown on the long-term time frame and enter the market using the short-term time frame.

Now, let me try to demonstrate the way multiple time-frame analysis helps me decide if I should enter into a trade or not enter into a trade using the above guidelines.

When I trade on a 240-minute time frame, I choose to look at a daily-chart as my long-term time frame. The chart below shows a EURUSD pair on 24/10/2014. The daily chart shows information in the past 6 months on the EURUSD pair and it showed a clear downtrend where the price stayed steadily below both the 20 and 50 EMA since early May 2014 with the exception of a small spike in the beginning of July. This gives me a clear idea of the market sentiment.

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Next, the 240-minute chart will be my medium-term time frame where I zoom in to check the smaller movements on the currency pair. These movements cannot be easily observed on a longer time frame but may contain important information which helps me to plan my trade. For instance, it is seen in the EURUSD 240-minute chart below that there is a strong horizontal support at about 1.2622 which was tested two times on 10 Oct 2014 and 15 Oct 2014. The EURUSD is now trending towards to the support.

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Finally, I zoom further down to my 60-minute chart which is my short-term time frame. I use the short-term time frame to execute my trade as price movements are most clear in this time frame of the 3 I chose and this should allow me to pick a good entry point. If we look at the EURUSD chart below, it is more visible that the price is trending towards the horizontal support at about 1.2622 and it can be further seen that there are some consolidations between 23 and 24 Oct 2014 as the price fluctuated above the horizontal support.

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Finally, combining the information obtained from all three charts, I understand that the overall trend is a downtrend but the price is trending towards a strong horizontal support level. A short position may thus be taken once there is a breakout to below the horizontal support. The breakout may be observed on the 240-minute chart and the 60-minute chart may be used to pinpoint the breakout point to execute the trade. The short position has significantly lower risks as the overall downtrend has already been identified and this trade is placed in the direction of the overall trend which is less likely to reverse.

In conclusion, a multiple time-frame analysis should always be adopted in planning a trade as it gives more reassurance to the accuracy of a trade by allowing a trade to be placed in the direction of the trend.