Successful trading is a combination of Discipline, Risk Management and High Probability Trading Strategy. Traders do many odd things to improve the probability of their trading strategies. Things such as looking at multiple indicators, replacing multiple trading systems, fine tuning their stock selection etc. In this case, one of the most commonly used (or perhaps misused !) approach is Multiple Time Frame Analysis or Multi Time Frame Analysis.
What is Multi Time Frame Analysis?
Multi time frame analysis is a method in which a trader observes the Price Action or Market activity of a Script (It could be a Stock chart or a Commodity chart) on various timeframes to improve his decision making. The reason behind this approach is that, trends are more visible on longer-term time frames, whereas reversal signals or potential entry – exit levels will be clearer on shorter-term time frames. So with help of Multiple Time frame analysis, A Trader can not only understand the big picture but also gets a better entry – exit points on a trade.
Of course, there are many time frames starting from 5 Minutes to 1 Month and there is no limit on how many time frame combinations a trader should choose to watch. But there are some general guidelines that most professional traders use when it comes to Multi time frame analysis.
General Guidelines of Multiple Time Frame Analysis
Many Professional traders use a combination of 3 Different timeframes – A Lower time frame or LTF, which is used to fine tune entry – exit points on a trade. An Intermediate time frame also known as Trading time frame or TTF, which is used to find trading setups. (Trading time frame also represents your trading style). Finally a Higher time frame or HTF to keep an eye on the big picture and long term trend.
For Example: If you’re a Swing Trader then your Multi time frame approach would be similar to this:
4h or 4 Hour time frame to find Trading Setups (TTF)
1h or 1 Hour time frame to fine tune your entry – exit points
1W or Weekly time frame to keep track of the long term trend and big picture
A Practical Example of Multi Time Frame Approach
1. Finding the Price Action Setup on Trading Time Frame or TTF (4 Hour)
2. Fine Tuning the Price Action Setup on Lower Time Frame or LTF (1 Hour)
3. Cross-checking the Big Picture and Long Term Trend on Higher Time Frame or HTF (1 Week)
Why Pro traders use Multiple Time Frame Analysis?
Right now, it’s very obvious why some pro traders prefer to use multiple time frames. It helps to have both – a bird’s eye view of price action and fine-tuned entry or exit levels for a trade. A proper application of Multi time frame analysis combined with right Price Action Strategies can get you high probability trades with excellent Risk – Reward.
There are many positive reasons why you should use multiple time frame analysis and advantages of doing so. You will find many contents and articles all over the Internet bragging about the advantages of multiple time frame analysis. But most of them miss out an important key point – it’s the disadvantages that come along with Multi time frame approach if applied in a Wrong way.
Disadvantages of Multi Time Frame Analysis
Multi time frame chart reading can tell us more about the price action rather than just looking at a single time frame. But it’s necessary to apply multiple time frame analysis in a proper systematic way or else it could lead to “Analysis – paralysis”. Typically using 3 Different times frames can give a better perspective on the Market activity, but if a trader uses more than 3 different time frames then he might often end up with confusion and not clarity.
Apart from that, it’s also important to select the correct time frame and time frame combinations. A long-term trader who holds positions for months will find little use for a 15-minute, 60-minute and 240-minute time frame combinations. At the same time, a day trader who holds positions for hours and rarely longer than a day wouldn’t have any advantage in looking at daily, weekly or monthly charts. The time frame and the time frame combinations that you choose should be relevant to your Trading style.
Last but not least, your trading strategy also matters. Some strategies works quite good when combined with Multi time frame approach whereas few other strategies are best suited for Single time frame. Most of the Technical Indicator based strategies are single time frame oriented; applying them based on multiple time frames doesn’t increase any probability and only could lead to confusion!
Some Conclusion Points
These are some conclusion points related to Multiple Time frame analysis you need to keep in mind:
1. Professional Traders prefer to use Multi Time frame analysis because it can help to keep track of the big picture and long term trends. At the same time, it also helps to fine tune their entry – exit points.
2. General guideline is to use a combination of 3 Different Time frames relevant to your trading style – LTF (Lower time frame), TTF (Trading time frame) and HTF (Higher time frame).
3. Proper Application of Multiple Time frame analysis combined with right Price Action Strategies can result in High Probability trades with excellent Risk – Reward.
4. It’s necessary to choose the correct Time frame and Time frame combinations as per your trading style and Trading Strategy. Improperly using Multi Time frame analysis could lead to “Analysis – Paralysis”
So consider these important points before planning to adopt a Multi Time frame based trading approach. The key question you should ask yourself before using Multiple Time frame analysis is – Does it lead to any improvement in my trading or not? Based on the answer take your decision!
