Multiple Time Frame Analysis Techniques In Forex

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The multiple time frame analysis technique is something that I am sure many traders have heard of. Whether it’s the structured Triple Screen Trading method or simply looking at a time frame 4x higher than your trading chart, this analysis can assist you in a trade decision.

One thing that confused many traders is using multiple time frame analysis in terms of trend. “Trade in the direction of the higher time frame trend” is something that we’ve all heard from the day we began trading. I personally don’t use that methodology by taking a quick look at a trend indicator or general price movement but attempt to gain more information from the higher time frame.

 

Multiple Time Frame Analysis In Forex

The best way to explain one way I use multiple time frame analysis is to look at a current trade that I have taken in the CHFJPY Forex pair. Whether it works or not is not the issue because it will be a success because I followed my trading strategy.

Judging your trading on results is a losing proposition considering that regardless of your trading system, you will take multiple losses in a row and the expectancy research you have done will show that.

Basing your failure or success on properly implementing your edge, whether its multiple time frame trading as I do or single chart analysis, is much more productive.

This is the daily chart which is the chart I generally look at for setups during my analysis and is the first chart in my multiple time frame analysis that I want to talk about.

MULTIPLE TIME FRAME ANALYSIS IN FOREX
MULTIPLE TIME FRAME ANALYSIS – DAILY FOREX CHART
  1. Triple top formation is certainly bearish but what’s interesting is the bears where not able to push price a great distance.
  2. Was temporary support but even the break of that, as indicated by the candlesticks, doesn’t convince me that there is a lopside battle going on at this point.
  3. Strong push into this zone was halted.
  4. Not used by me but added for those that use it, this is the 50 SMA which would disallow long trades as you wait for a pullback

My trade is a long trade but I will quickly add that it I was not trading support. I do trade support “bounces” but there are certain patterns I will look for in these locations.

Overall, this daily chart is a mess and qualifies as a range bound market at this point however it hides a common trading tool. Perspective is given through a higher time frame analysis on this pair.

 

Weekly Forex Chart Analysis Sorts Out The Mess

The weekly chart highlights how strong this up move really was in the CHFJPY. If you were to an put oversold/overbought indicator on the chart it would indicate that this market is overbought. The general rule is to stand aside and anticipate a reversal in price.

WEEKLY FOREX CHART ANALYSIS
WEEKLY FOREX CHART ANALYSIS

What the indicator doesn’t tell you is that even after a move like this, a consolidation can actually work off the overbought (oversold) condition. A big retrace in price is not written in the cards during these conditions. Something the textbooks don’t teach.

  1. This consolidation (high and tight flag) may be enough to work off 8 weeks of the upwards drive.
  2. Failure test of lows as price broke through and on the same candlestick drove straight back into what appears to be a range.
  3. This inset is the consolidation but you can see with the black lines that we are actually looking at an A-B=C-D price movement aka complex correction

Taking everything from the multiple time frame analysis into context, I could build a case for taking a long trade. Again, this is not simply seeing a support zone (although it could not be called support until after price rejected during the second visit).

 

Putting a Case Together From The Multiple Time Frame Analysis

While the daily is pretty messy, the weekly chart smooths everything out. A strong bull market emerged and continued for the last 8 weeks. Indicators will show overbought and price has gone into a consolidation at the highs of the move.

The consolidation is trading 1-1 as in both pushes in price are equal and price had broken a zone of potential support and snapped back inside. This tells me the bears are not strong enough at this point.

I dropped back to the daily chart for the trade entry. You can see in the chart below it was a buy stop above the candlestick that helped build that failure test on the weekly chart. I used an ATR stop that was entered when the trade triggered.

Once price went in my favor, at end of day I cut the risk virtually in half and the stop is sitting at the low of the day.

FOREX TRADE ENTRY AFTER MULTIPLE TIME FRAME ANALYSIS
FOREX TRADE ENTRY AFTER MULTIPLE TIME FRAME ANALYSIS

 

Give The Trade Room To Grow

Some traders may be surprised that the current stop location was not the initial location. The fact is that too many traders use tight stops so they can have a larger position size.

That’s the wrong way to set your stop and you are sitting ducks for stop runs. That said, if I am triggered into a trade and there is a strong momentum move against me, I won’t wait for my stop to get hit.  When you enter a trade, especially on the back of multiple time frame analysis that leans in one direction, strong moves against you point to trade failure, not success.

My initial stop is far enough away for wiggle room and to allow a triggered trade to mature.  Once there is a push in my direction, if price returns to the base of the thrust, that’s not a good sign.  I will take a loss but it will be much smaller than the one I planned for.

Multiple time frame trading is a great addition to any trading strategy.  Try it out, test it, and see if it doesn’t tilt the odds further in your direction.


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CoachShane

Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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