Today we’re going to talk trading time frames. And please we’re not going to watch a movie called “The Big Picture.” We’re going to be looking at the big picture using multiple time frame analysis. We are looking at the big picture so as to gain better perspective on the direction of the trend. Have any of you seen 1 min 5 min, 30 min 1 hr 4 hr, time f on your MT4 platform? These are the different time frames that currency pairs are traded in.Think of these time frames as different time zones.
Take a close look at the time frame labels right on top of and underneath graphic. They’re the time frames that I’m referring to. Each time frame shows the same data but in a different trend. All time starting with H represent hours, and all time frames starting with M represent Maths. However, there are other time frame frame categories for daily, weekly, and 8 hour time frames.
Now why do we want to gain better perspective on the the direction of the trend? because the direction of the trend is different in each time frame.I’s absolute suicide to trade in just one time frame. Why? You could have the GBP/USD pair in an uptrend on the 1 hr chart but then reverse to a downtrend on the 4 hr chart. Even more important it saves you the headache of losing trades on a regular basis.Now that’s one massive headache we want to avoid.Don’t we?
So we we’ll do the following. We”ll define what multiple frame analysis is,Why we need to see the bigger picture using Multiple Frames, and how we trade using multiple time frames?
I guess the question of the day is:
What exactly is Multiple Time Frame Analysis?
Well basically, multiple time frame analysis is the process of looking at the same currency pair and the same price but at different time frames. The currency pair exists on time frames ranging from the 1 minute time frame to the monthly time frame. It’s like looking at two things with different sets of lenses. The strange thing about multiple time frame analysis is that two traders may have a difference of opinion on a currency pair as wide as the Grand Canon,and yet they may be spot on about the pair. For instance one trader sees the GBP/USD pair on the downtrend on the 4 hr trade. While another may see the same pair ranging up and down on the 5 minute chart
However, this poses a major problem. When a trader sees a signal to sell at the 4 hr time frame, but then takes a peek at 1 hr time frame only to see the bulls gradually climb the hill, he immediately develops this puzzled look on his face like, “What the heck is going on here?” Then he asks himself”Do I go with the 4hr frame, and run with the sell signal? Or do I play Heads or Tails and decide whether to buy or sell”? Unfortunately both options are recipes for disaster.
Which bring us to the next question?
Which Time Frame Fits My Personality?
One major reason why a lot of traders flop is they fail to ask themselves “Which Time Frame Fits My Personality?” Some trade the 1 minute and 5 minute time frames,hoping to strike it rich. Unfortunately they incur huge losses and quickly get frustrated because these two trading time frames do not fit their trading personality.
Some forex traders feel at home trading the 1 hr time frame. Why? Because, in his opinion, this time frame has balance. It’s long but not too long. And it has fewer trading not signals, but not too few. This time frame gives them more time to look for trades and not feel like they have to rush to catch a plane. On the other hand, there are som traders who would never trade the 1 hr time frame if the lives depended on it. They find this time frame so slow that they’d probably slip into a coma unawares before spotting a trade. So instead they prefer trading in the 10 minute time frame because it gives them just enough time to implement decisions on his trading plan. Ten minutes may not be enough time,but hey to each his own.
There are also another set of traders who are like”Why would anyone trade on a 1 hr trade”?It’s too fast.” So they only trade on daily,weekly, and monthly charts which bring stability and solid profits. Some of you are probably “ How Will I Know The Time Frame That Fits My Personality?” Well, I suggest you open a demo account where you use virtual cash try out all the various time frames until you find the time frames that fit your personality best. Once you discover the time frame that fits your personality, you ‘re now ready to go live on the forex market. In fact while trying out your time frames on your demo account, you can try out your other trading strategies also. This will make you better prepared before you decide to go live.
Which brings us to the next burning question.
What is The Best Time Frame to Trade?
At the risk of sounding like a broken record, it depends on your trading personality. If you like to take things slow like a turtle and deliberate on your trades, then longer time frames like daily, weekly and monthly charts could be your cup of tea. If you like everything fast like a Formula I race car driver, the 5 minute charts will suit your fancy. Just make sure you don’t get burnt. Below is a table,courtesy of babypips.com, which highlights the various time frames and the differences between each of them.
|LONG-TERM||Long-term traders will usually refer to daily and weekly charts.The weekly charts will establish the longer term perspective and assist in placing entries in the shorter term daily.
Trades usually from a few weeks to many months, sometimes years.
|Don’t have to watch the markets intraday.Fewer transactions mean less times to pay the spread.
More time to think through each trade
|Large swings usually 1 or 2 two goods a year so PATIENCE is required.Bigger account needed to ride longer term swings
Frequent losing months
|SHORT-TERM (SWING)||Short-term traders use hourly time frames and hold trades for several hours to a week.||More opportunities for trades.Less chance of losing months.
Less reliance on one or two trades a year to make money
|Transaction costs will be higher (more spreads to pay).Overnight risk becomes a factor|
|INTRADAY||Intraday traders use minute charts such as 1-minute or 15-minute.Trades are held intraday and exited by market close.||Lots of trading opportunities.Less chance of losing months. No overnight risk||Transaction costs will be much higher (more spreads to pay).Mentally more difficult due to the need to change biases frequently.
Profits are limited by needing to exit at the end of the day.
There are two things you need to get out of this tabular explanation.First is that smaller time frames give you the freedom to make better use of your margin and put in safer stop losses. Second, larger time frames require huge stops. To be able to put in these huge stops, you need a larger trading account in order to deal with the market swings without facing a margin call from your broker.
Some of you are wondering “What’s a margin call?” Well A margin call is a broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when the account value depresses to a value calculated by the broker’s particular formula. In other words, your account is running low,and that you need to top it up.
Just remember that your choice of time frame should fit your trading personality. It’s like a man looking for his rib, or his significant order. If the rib doesn’t fit, it means the woman is not meant for him. It’s the same thing with choosing a time frame. If your choice of time frame does not gel with your trading personality, it’s not meant for you. You need to try all the all these time frames ,and decide which time frame fits your persona. Once you’v found the right time frame to fit your trading personality then you can explore your horizons by looking at trading multiple time frames.
I guess some of you are like:
Why should I Trade Multiple Time Frames?
Because it’s good for your soul. And You need to, you guessed it, LOOK AT THE BIG PICTURE. You cant get stuck on one time frame for the rest of your life. Let me create a nice little scenario.Let’s say you are looking at a 10 minute chart of the GBP/USD. You see a 200 SMA(Simple Moving Average ) which appears to b resisting the bears. With resistance holding and the bulls turning into doji’s, You’d think “Now is the perfect time to sell” as illustrated below.
Well, “Not so fast” says the GBP/USD pair. The pair do a 360 and charge through the resistance barrier, gaining another 200 pips. And then you are like “What’s going on here?”
Well let’s open up the 1 hr chart and see what happened.
If you had been paying attention,you’d have noticed that the pair had started inching up from the bottom of the ascending channel. Also, that doji you thought had formed at the resistance was actually announcing its presence at the level of support! An obvious buy trade signal, if you ask me. Take a look below.
Open up the 4 hour chart and the ascending channel become a lot clearer as indicated in the graphic below.
If you had been patient enough to check this 4 hr chart first, you would have saved your money the trouble of going short like you did on the 10 minute chart. And I like stated earlier, all the charts are showing the same data except that the data was shown in different time frames/
So do you now understand the importance of surveying multiple time frames before trading?
As the saying goes,if something is too good to be true,don’t fall for it. The same rationale pertains in forex trading also. I’ve fallen for it several times myself. You see while the price grinds to a halt on the 10 minute chart it can also massage the support barrier in the 4 hr time frame. The moral the story is the larger the time frame, the higher the likelihood of a support or resistance level holding sway.
Trading multiple frames will most certainly save you from losing needless trades .These frames also help maintain your trading position a little longer, which of course will do wonders for your trading account. Also, by using multiple time frames you get a better view of the bigger picture. You are able to gauge your trades better as a trader, as opposed to putting in five average trades within a week. Not to mention the fact that you risk losing valuable cash in these trades.
I guess the moral of the story here is not to get hooked on one time frame and ignore the others. You risk getting distracted by flash trends that don’t last, and, at the risk of repeating myself,you miss the big picture.
Now that we’ve identified why we need to utilize multiple time frames in our trading, I guess the appropriate question should be:
How Do I Use Multiple Time Frame Analysis to Find Solid Entry and Exit Points?
Take a holistic look at,you guessed it, THE BIG PICTURE. In other words, take a broad look at what’s happening on the market. But please don’t get too chummy with market. Stay as far away as possible from the market. Why?Because a longer time frame takes longer to develop meaning that it will take a humongous market shakeup for a currency pair to change routes. Also support and resistance levels take on greater significance in longer time frames than the shorter ones.
With that in mind, start by choosing your favorite time frame to trade. And then move up to a higher time frame.Next,you ask yourself “Do I go long or do I go short”? This depends on whether the market is ranging or trending. Now go back to your favorite trading time frame to decide on where to enter and exit your trades. In layman’s language, decide on where to place your stop loss and profit targets. Also, Keep in mind that by trading using multiple time frames,you get an edge over other traders whose vision is stuck on only one time frame.
Now that I’ve shown you how to find entry and exit points using multiple time frame analysis, I guess the burning question on your anxious minds is:
How Do I Apply Multiple Frames Analysis.
Simple. I’ll show you a practical example of how it works. After a few months of practicing on your demo account , you come to the realization that the EUR/USD pair makes you feel good. And that you’d like to trade this pair on your live account. So far so good. You first start off with the 1 hr chart because you believe the 15 minute chart runs too fast like a Ferrari, and the 4 hour chart crawls like a turtle. You’d rather go for the 1 hr chart because it’s not too fast, not too slow.
So you then check out the 4hr chart to help you ascertain the overall trading picture as far as trend goes.
Upon further reflection, you say to yourself “Hmmm this pair is clearly on the uptrend. I should be looking to buy.” This makes sense because, as the saying goes, the trend is supposed to be your friend.Right? Besides the last thing you want is get caught in no man’s land by way off trading against the trend. The market won’t forgive you for that.
You then U-turn back to your favorite 1 hr chart, hoping to spot an entry point.
You discover a doji sitting comfortably on on your trendline. You then say to yourself with a thick frown on your face,”Hmmm! Should I go for this?”You’re asking yourself this question because you do not want to make a false move that will bite you later. So you hurriedly revert back to the 15 minute chart in the hopes of finding a better entry point that will give you better confirmation. You get back to the 15 minute chart line to discover that the trendline is holding the fort quite strongly. Your gut instinct tells loudly and clearly ”THIS COULD BE A GOOD TIME TO ENTER AND BUY.” You realize your instinct was spot on because the bulls continue to rise, causing the EUR/USD to climb the charts. So you gleefully enter your trade,with the view to keep your position open and pick up about 400 pips along the way – not bad for a couple of weeks work.
Keep in mind that you can only do so much with too many time frames. The last thing you want is a slew of charts spread across your PC screen, and giving you different readings. This is enough to give you a humongous head ache, not to mention pull your hair out also(If you have any at all).
What’s the moral of the story?Look at no more than two time frames- maybe three. Anything more than that will send you straight into analysis paralysis followed closely by insanity.
Now is this a better way to do multiple frame analysis or what? Basically you just have to find what strategy works out best for you. And make sure you keep the big picture in mind.
That’s a wrap for “Looking At the Big Picture Using Multiple Time Frame Analysis . ” It really pays to look at multiple time frames before entering your trades. You get the big picture as to where a trend gets started. And you spare yourself the heartache of of missing out on a trade simply because you failed to do proper diligence without scanning all the time frames.
Til next time take care.
If you’re looking to open a live trading account sign up with EasyMarkets.