Multiple Time Frame Analysis in Forex, Cryptocurrency or Stock Trading

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Multiple time frame analysis is a form of trading in which the trader makes a trade decision based on price analysis of multiple charts. The chart analysis is done in sequence, starting from the long term chart and ending with the 1-hour or 15-minute chart.

The basis of this strategy is to configure the trades to follow the trend. The trend is determined first in the long term (weekly chart), followed by the intermediate/medium-term trend (daily chart) and the short-term trend (hourly chart). The long term trend tends to last for many months and even years, while the medium-term trend lasts for several weeks to months.

According to a popular trading mantra, the trend is the trader’s friend until it ends. Therefore, setting up a trade in the direction of the trend is the logical way to trade. The only way to know what the trend truly is, is by looking at the long term chart. That way, you do not get sucked into a situation where you trade off a short term chart thinking you are in a trend, but probably in a retracement move within a long term trend.

The Time Frame Analysis

This section details the process of the multi-time frame analysis, starting with the weekly chart. This is the principle of multi-time frame analysis.

  1. Use the weekly chart to get a long term view of the trend of the asset.
  2. The daily chart presents the medium term view. There are things to look out for on this chart. Is the asset in a retracement and close to a renewal of the long term move? Has the asset broken a key support or resistance and about to resume the long-term move? In essence, look for something to support the trend on the weekly chart.
  3. Step down to the hourly chart and search for a valid trade setup in the direction of the trend in the weekly chart, and the picture on the hourly chart.

There may be cases where you see a trend on the weekly chart, but a different picture on the daily chart. For instance, you may see a potential double top on the weekly chart (a bearish signal), with prices rising on the daily chart. In this instance, you would do well to wait for the weekly chart setup to complete before taking any decisions. But where the trend still has some way to go on the weekly chart, then your decisions would be based on seeing any setups on the daily and hourly chart that support a move in that trend.

Examples

In the weekly chart shown below for the BTC/USD pair, we can see clearly that the asset is in a downtrend, and has been since January 2018. Furthermore, the price action for the week has seen the weekly candle break below the $5747 support line. This is a completion of the descending triangle setup which sees the support line as the being broken as the resolution sequence. Therefore, the downward trend continues.

BTCUSD Weekly timeframe chart

BTC/USD Weekly Chart

At this juncture, we move to the next stage of the price analysis, which is the daily chart. What does the daily chart tell us? We can see that the daily chart shows that the 5 candles for the week have ended in a sequence that has led to the break of the support line seen at $5,747. This area is a price area where price had found support in June and July 2018. Therefore the daily chart confirms that the trend will continue to move to the downside.

BTCUSD Daily Time Frame Chart

BTC/USD Daily Chart Showing Break of Support

At this juncture, the trader should only be considering short trades, and the essence of using the hourly chart is to identify setups that will point to the exact entry and possible exit spots for the short trade. So what does the hourly chart tell us?

BTC/USD 1 Hour Chart

BTC/USD 1 Hour Chart

We utilize the pivot points to showcase possible price areas where short trades are possible. To do this, we look to see if there are price highs that can be connected with a trendline, which will form a basis for a short trade off a resistance. We also check to see if there are candle setups, pivot point setups or any kind of trade entry confirmation setups that will support a short trade. The hourly chart presents the following:

  1. There is a trendline that connects 4 price high areas: points 1-4.
  2. Point 4 is at a point where price action for the day has been resisted at the pivot point (purple broken line). This is therefore a valid area to make a short entry. We can see prices already making the move south from that point.

Therefore, a short trade from the pivot point price of $5,532 would have been a valid entry point for such a trade, using the next pivot below this area (S1) as the 1st profit target, and setting the stop loss above the entry point. The SL:TP ratio (risk-reward) should be at least 1:3, ensuring that at least 3 pips are gained for every pip risked as stop loss.

Related: How to Set the Stop Loss (SL) and Take Profit (TP) Targets

This is essentially what is involved in conducting multi-time frame analysis. A trend is picked out on the weekly chart, and a supporting setup in the direction of the weekly chart trend is sought for on the daily chart. If this is seen, then an entry setup should be sought for on the hourly chart, in the direction of the weekly/daily chart trends.

Using this principle, traders will avoid mistakes of trading against the prevailing trend in the market for any asset they choose to trade.

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