Secrets Revealed: How to Use Time Frame Analysis in Forex

Trading with the help of chart patterns, trend lines, channels, and others is very common in the forex world. These trading techniques help the trader to take timely decisions based on known facts and calculated risks. Many of the forex traders, both beginners and pros, in the foreign exchange market might have come across times when they need to analyze and take a decision within a constrained time limit. This is when they must have been introduced to their new acquaintance, which is a new concept and an addition to your forex toolbox, the concept of multiple time frame analysis.

What is Multiple Time Frame Analysis?

Multiple time frame analysis, as the name suggests, is simply monitoring the same currency pair currently at the same price, at different frequencies or time frames. These frequencies include monitoring the currency pair on a 15-minute chart, 30-minute chart, 1-hour, 4-hour, daily, weekly, monthly, and many more. As you can see there is no limit to these frequencies as to how many of these can be, there is also no limit as to which one can be used in combination with other.

This shows that different forex traders will have different opinions about the market or a currency pair, and will take different trading decisions depending on the time frame or time frames they select for their analysis.

Problem with Different Time Frames

Although these time frames are extremely useful, they can create confusions for forex traders. This is because different time frame charts might show different signals. For example, a 4-hour chart might show a sell signal for a currency pair for which a 1-hour chart shows that the price is slowly climbing.

Which Time Frame to Select?

To overcome the problem mentioned above what you need to do is to learn to use multiple time frame analysis to your own advantage by selecting a time frame that best suits your personality which you should initially focus on.

One of the reasons why many beginner forex traders are not able to perform well is because they do not select and trade using a time frame that is a suitable match for their personality. What they do is that they get greedy and want to make quick money because of which they start analyzing 15 or 10 minutes charts and then easily get frustrated as they start losing money. This doesn’t even help them in making decisions based on rational.

There are traders who are best in comfort with a 1-hour chart, others happy with taking trading decisions based on weekly charts, and some like to be quick and base their decisions on a 15-minute chart.

Well, if you have been paying attention to what we have been talking up till now then you would have understood by now that it all matters to what kind of a personality you have and what amount of pressure are you able to take.

It is therefore recommended for beginners to first trade using a DEMO account to understand what kind of chart you can withstand and what is your comfort zone. It has virtual money involved in it and would relieve you from the pressure or sense of frustration you would feel if real money is involved in trades, which is quite frankly speaking a very natural phenomenon.

What is the Best Time Frame for Trading?

It all comes down to your level of patience, excitement, and personality. To understand the differences between different time frames we have summarized their qualities along with their advantages and disadvantages in the table below.

 
Time Frame Description Advantage Disadvantage
Long-term These kinds of traders mostly refer to daily and weekly charts for taking trading decisions. They believe that these charts would provide them with a longer-term perspective of the market.

They usually trade on a weekly to monthly basis, or even sometimes in years.

They do not have to closely monitor each price movement in the market.

Make fewer transactions which means they would pay less in spreads.

Have more time to think for each trade

Patience is required as large swings would only take place once or twice a year

Bigger account needed

Remaining months would have more frequency of losing than gaining

Short-term These traders use hourly time frames to gauge what the current trend of the market is.

Usually, they hold trades for several hours or even for a week.

Because of closely monitoring the market they have more opportunities for trade.

Less amount and chance of losing months.

Less reliance on a specific number of trades in a year in order for them to make money.

Because of more trades and transactions, their transaction costs will be high as they have more spreads to pay.

One of the major risk factors is the overnight risk.

Intraday These are the traders who use minute charts ranging from 1-minute charts to 15-minutes charts.

They hold their trades for intraday and are then exited by the end of the day at market close.

With this frequency of using timeframe analysis, they have lots of trading opportunities available to them.

Because of this they also have less chance of losing months

And since every trade is exited by day end they have no overnight risk involved

Entering and exiting each day and after every couple of minutes during the day means that their transaction costs will be much higher because of which they will have to pay more spreads.

Mentally more difficult due to the need to change biases frequently.

Limited profits as you need to close and exit at each day’s market close.

One other factor that needs to be considered along with the time frame is the amount of capital you have available for trading. With shorter time frames you have the opportunity to better use your margin and have tighter stop losses, whereas larger time frames are only suitable for bigger accounts which require bigger stops. This helps you handle market swings without facing a margin call.

Using Multiple Time Frames When Trading Forex

Till now you must have understood your personality, your temperament, and your comfort zone. Now once all this is sorted out it is time for you to move from the Demo account towards reality and to take one step above by analyzing more than one chart to take a trading decision. This is because we find it necessary for you to flip through different time frames to get an idea of how same currency pair with the same price looks in different time frames.

Let’s look at an example of two different time frames and decide if we should go long or short based on what the chart is showing us.

multiple time frame trading system

The chart above is an example of a 10-minute chart that shows the 200 SMA (Simple Moving Average) which shows that it is being held as resistance. The price seems to test this resistance and a doji has also been formed which suggests that this is the time to short.

So below is the illustration of what happened next.

multiple time frame trading methodology

The pair that you shorted closed above the resistance level and raised another 200 pips. Well, this is not what you expected, right?

To understand where we went wrong let’s look at the 1-hour chart and see what story it has to tell us.

ichimoku multiple time frame analysis

Woah! This 1-hour chart shows us that the price was actually at the bottom of the ascending channel and the doji that we were previously referring to formed right on the support line which is a clear signal of a reversal in the market and hence the time to do some buying.

This ascending channel and the formation of doji is even clearer in the 4-hour chart, which shows that the trend pattern was always stuck inside a rising channel and never left it.

multiple time frame trading strategy

Had you have seen these charts before and did a multiple time frame analysis you wouldn’t have been that quick to enter into the short position. Now you understand the importance of what it means to look at different time frames of the same data.

This is the very reason why pro forex traders like to say that ‘Always look at the big picture’. This will help you understand what actually is happening when the market stalls or reverses in a 15-minute chart. It might actually be possible that it had hit a resistance or a support level on a larger time frame.

Using Multiple Time Frame Analysis to Find Entry and Exit Points

The main concept that should be there at the back of your mind is that it takes a big move to change the course of the trend line in a longer time frame as it takes more time to develop in it. Also, support and resistance levels are more significant on longer time frames.

The first step that you need to take is to select a time frame that is best for you. Then take a step further and select a time frame that is higher than the selected preferred time frame. Here with the help of this time frame, you can reach out to a decision by looking at the market if it is ranging or trending and if you should go long or short.

Next, you would look at a time frame lower than your selected preferred time frame to make some tactical decisions regarding the entrance and exit of the market.

Let us understand this with the help of an example of a EUR/USD chart. You look at a 4-hour chart that shows you an uptrend and since we have learned that the trend line is our friend we tend to take trading decisions in the same direction as it is.

best time frame for swing trading

Now assume your preferred chart is a 1-hour chart so you zoom back to it to see what is happening there and to spot when you should enter the market. What you see is that a doji candlestick has formed right on trend line where it is being tested.

multi time frame support and resistance indicator

But you are still not sure if this level would hold so you look at a chart lower than your preferred one, which in this case is the 15-minute chart, and what you see is that the trend line seems to be holding pretty strongly.

multiple time frame strategy

Looking at these three time frames you decide that it is a good time to enter the market and do some fresh buying. This is then revealed by the chart below that your analysis was correct as the uptrend continued.

Multiple Time Frame Combinations

By looking at these three time frames it allowed you to take a correct and timely decision at the end of all of it.

Multiple Time Frame Combinations

Different time frames can be followed by you depending on your personality and with what time are you comfortable with. Basically, you can use any combination of time frames as there is a sufficient amount of time difference between the time frames so that you can see a difference in the movement.

Some of the most common combinations used by forex traders are as follows.

  • 1-minute, 5-minute, and 30-minute
  • 5-minute, 30-minute, and 4-hour
  • 15-minute, 1-hour, and 4-hour
  • 1-hour, 4-hour, and daily
  • 4-hour, daily, and weekly and so on.

When deciding a higher and lower time frame chart from your selected preferred time frame chart it is always advised by professionals of this field to make sure that there is enough time difference for the smaller time frame for it move back and forth without every move reflecting in the larger time frame.

This is because if the time frames you are analyzing are too close to each other then they would not be of much use as it would be difficult for you to spot the differences.

 

Source of Charts and Graphs

https://www.babypips.com/learn/forex/why-trade-multiple-time-frames

https://www.babypips.com/learn/forex/time-frame-mashup