When you meet a person once, you form an opinion about that person in your mind. Don’t you? When you meet the same person another day, your opinion about him changes a bit. You meet him again the third time and the picture becomes clearer to you. The more you meet someone the better you know him or her. Similarly since Forex trade happens on multiple time frames, hourly, daily etc., it is always better to analyze the price movements across various timeframes before taking your decision. A single currency pair might be moving in different directions if you look at a 15 min chart and a daily chart.
A currency pair moves through several time frames simultaneously. Thus a trader needs to examine various timeframes to determine the momentum in the respective timeframe. A trader should ideally wait till the momentum in each timeframe aligns and that’s the intention behind multiple time frame analysis in Forex market.
Now let’s try to understand what multiple time frame analysis is. Where do we start? We start with looking at the trend to identify the direction of price movement over time. Analyzing multiple time frames means analyzing a currency pair across various frequencies. You can analyze across any number of time frames. But it is recommended to follow some general guidelines so that you don’t end up losing time and money. It is suggested that using three different periods to analyze gives enough amount of view on the market. If traders try to concentrate on one or two time frames there are chances that they won’t be able to figure out the actual direction of the market. Normally new traders tend to concentrate on one single time frame with the intention of making money faster. But by now you know that it’s not enough.
Ideally first choose a time frame you would like to look at and then choose a time frame which is one fourth shorter than the first. Then choose another one which is one fourth longer than the first one. This way we have three time frames to analyze upon. What we are trying to say choose any time frame but make sure there is enough difference between them so that you can actually see the difference in price movement. For example, a 15 minute, 60 minute and then probably a four hour chart (240 minutes). These three can give you the difference in price movements as they have considerable amount of gap between them.
Here are some other examples:
- 1-minute, 5-minute, and 30-minute
- 5-minute, 30-minute, and 4-hour
- 15-minute, 1-hour, and 4-hour (Our example)
- 1-hour, 4-hour, and daily
- 4-hour, daily, and weekly
So, it actually depends on the trader to choose the three time frames for the time period he wishes to trade for. For example a day trader who does hourly trades won’t get to analyze much from the weekly or monthly charts. Similarly a long term trader won’t find it much beneficial to use an hourly or daily chart.
It’s all about aligning all the charts to match in such a way that you get a single view so as to proceed with your trade. Like arranging the blocks of a jigsaw puzzle to fit together so that you get to see the whole picture. A clear benefit from analysing multiple time frames is the ability to identify the entry and exit levels in the Forex market. Keep looking at the big picture and your chance of success improves.