Multiple time frame analysis
allows you to take a top-down approach, so that you make a more informed trading decision. This approach gives you the flexibility of using more than one time-frame to establish long, medium and short-term trends. A wider time frame helps you to establish the longer-term trend and gain a bigger picture of the pair you wish to trade. The medium-term timeframe helps you determine the current market bias and filter out bad trades. You can then use the smallest timeframe to find good entry and exit points.
What is Multiple Time Frame Analysis?
Also called multi-time frame analysis, is a process of viewing price action
for a currency pair under different time frames to help establish the main trend, filter out bad trades, and establish ideal exit or entry points into the market. You can use any timeframes that have enough time difference to help you see the difference in price action. To ensure that there is enough time difference, you should use a ratio of 1:6 or 1:4 as you switch between different timeframes. For example, when trading the 1-hour time frame, start with the daily chart to establish the main trend, then zoom into the 4-hour chart to weed out the medium-term buy or sell bias and filter out bad trades, and then use the 1-hour timeframe to identify ideal entry and exit points.Here are some multiple time frame combinations based on the 1:6 and the 1:4 ratios that you can use when trading with CFI:
•Weekly, daily and 4-hour
•Daily, 4-hour and 1-hour
•4-hour, 1-hour, and 15-minute.
•4-hour, 30-minute, and 5-minute
•30-minute, 5-minute, and 1-minute
How Do You Identify the Best Time Frame to Trade?
This largely boils down to the amount of time you have available to trade and carry out analysis on charts in a day. If you have one or two hours to scan the market and make a trading decision, you can use the 4-hour chart to analyze the overall price movement, the 1-hour chart to filter the buy or sell bias, and the 30-minute chart for the entry or exit trigger.Let us look at weekly, daily and hourly charts.
The Weekly Chart
A weekly chart shows the high, low, open, and close price for a traded security every week. Each point on the line, bar or candle chart is a summary of price action for the entire week. That means a weekly chart can show price action on a security for a whole year only on 52 candles, bars or points on a line.
•A weekly chart gives a broader perspective on a security's price trends over time than compared to both hourly and daily charts
•A weekly chart can summarize trends and patterns for a whole year in only 52 candles
•Forecasts from a weekly chart can last for a week, a month or several months
•A weekly chart is helpful for institutional traders and investors looking for longer-term trade opportunities
Uses of weekly charts
•To confirm price trends and signals: When used with daily charts, weekly charts help a trader to confirm price trends, as well as buy or sell signals. If indicators and trends on a daily chart are the same as the weekly chart, then the trader can enter a new position with confidence.
•Used by long-term investors: Weekly charts are commonly used by less active long-term investors to monitor price movements on the securities they have invested in. This enables them to view the longer-term trends or signals for potential changes in trends on their investment.
The Daily Chart
Daily charts are the most widely used time frames when carrying out multiple time frame analysis in the markets. Each candle or bar on a daily chart shows price action – the opening price, the closing price, the highs, and the lows – on a financial asset for an entire day of trading. It is commonly used by day traders to view different trading patterns that span multiple timeframes.
Uses of Daily Charts
•Daily charts are commonly used by intra-day traders to analyze trading patterns on multiple timeframes over several days.
•Daily charts are also used as a primary source of information for signals alerts that help identify profitable trading opportunities.
The Hourly Chart
An hourly chart shows price action on a currency pair or traded security every hour. Each candle or bar on the chart will show the highs, the lows, and the open/close price every hour.
Uses of an Hourly Chart
•An hourly chart is commonly used by day traders to identify ideal entry and exit points
Using the Weekly, the Daily and the Hourly Chart
Let’s say you want to use these three charts to carry out multiple time frame analysis before making your trading decisions. Here is how to move through the top-down process:
•Use the weekly chart to establish the main trend and get the big picture of the overall price action.
•Zoom to the daily chart to determine the current market bias and filter out bad trades.
•Zoom to the hourly chart to identify ideal entry or exit points in the market.
This is how multi-timeframe analysis works
. When you trade with CFI, you can use multiple timeframe analysis and filter out bad trades with MetaTrader 5
, and trade directly from the charts. Open your account with us now and start charting with multiple time frame analysis to spot ideal entry and exit points into the market.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The vast majority of retail client accounts lose money when trading in CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
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