Multiple Time Frame Analysis for Day Trading – Forex Trading

Multiple Time-Frame Analysis

Before you start applying the technical tools that I have introduced you to, the first question you have to ask yourself is: what time-frame are you going to trade the Forex market?

What is Multiple Time-frame Analysis?

As mentioned before, chart patterns and technical signals have more weight on a longer-term chart compared to a short-term one. Multiple time-frame analysis is all about analyzing patterns on different time-frames so that you get a much better technical overview of the currency pair that you are trading. For example, if the daily chart looks very bearish, and you are thinking of buying on a 5 min chart, you'd better think twice. Whether you scalp, day-trade or position-trade, it is absolutely essential for you to adopt multiple time-frame analysis.

My approach is to use a three screen system consisting of (1) a long-term time-frame, (2) an intermediate time-frame and (3) a short-term time-frame.

Time-Frame Suggestions

Day-traders or swing traders, who are looking to hold their positions for less than a day or for up to a week, may use the following time-frames:

1. Daily chart

Even if you trade 5 min charts, looking at a daily chart will greatly widen your perspective. Use moving averages as trend-following indicators, and Slow Stochastics and MACD Histogram as momentum indicators. Identify swing highs and swing lows for Fibonacci retracement levels. Indicate support and resistance levels, and draw up and down trendlines on your daily chart. Trade in the direction of the trend as shown in the daily chart unless you think that the market is about to reverse the trend. For example, if the daily chart and market sentiment looks bearish to me, I will only look for shorting opportunities on the 60 min chart. If daily signals are particularly strong on that day, I will enter my trade based on the daily chart.

2. Hourly chart

A 60 min chart will show you more details, and you may predict the intraday support and resistance levels based on it. Similarly, set up your trend-following and momentum indicators, indicate support and resistance levels, and draw up and down trendlines on your hourly chart. If you intend to hold your position for less than a day, this hourly chart gives you an idea of where you could put your protective stop and profit objective. When I intend to hold a trade for less than a day or a 1-2 days max, I use the 60 min chart to pinpoint my entry, and then confirm with the daily chart to make sure that there are no trendlines or moving averages blocking my entry.

3. 5 min chart

This is the main time-frame that you will be monitoring the currency pair most closely. If you use the 5 min chart to pinpoint your entry, always double-check with the hourly and daily chart.

The above suggestions are only guidelines. The multiple time-frames that you choose will depend on your trading style (frequency) and personality. Regardless of which time-frame you trade, it is always better to first analyse a larger time-frame, but monitor the smallest time-frame. It is essential even for a short-term trader to go with the overall trend.

You will be spending the bulk of your time analyzing the multiple time-frames, and calculating if the trades are worth placing. Look through your trading checklist, and make sure to only spend your money on the high-probability trades. Always remember that market sentiment will lead the technicals, so if the sentiment is very bearish on a currency pair, but the technicals tell a different story, it is better to trade in the direction of the sentiment because even the most chart-perfect technical patterns will fail.

 Real Chart Examples

Let's say the date is 12 May 2005, and we are pulling up the daily, hourly and 5 min charts to get an overview of the technicals.

Daily Chart of EUR/USD - Pre-trade

Figure 1 shows a Double Top, and that the last candle on the chart ( 11 May 2005) is closely approaching the neckline at 1.2730 (neckline of Double Top indicated by brown arrow). Fibonacci retracement lines drawn from the rally from 1.1757 to 1.3666 are in red, and their values are at the right-hand side of the lines. The 50% retracement level is at 1.2712. Now we go look at the hourly chart below.

60 min Chart of EUR/USD - Pre-trade

 Figure 2 shows the hourly chart of EUR/USD, and you can see that on 12 May 2005, the price is closely approaching the neckline at 1.2730. The price is below the three moving averages, and MACD Histogram is hovering in the negative territory. The price has just gone below 1.2766, which is a support from almost a month ago. If you had only looked at the hourly chart, you might have shorted when it went below 1.2766, and not knowing from the daily chart that the neckline of a Double Top just lies not far below at 1.2730, where EUR/USD could rebound.

5 min Chart of EUR/USD - Pre-trade

 Figure 3 shows a 5 min chart of EUR/USD on 12 May 2005, on which I have indicated the price levels of the Double Top neckline and the 50% Fibonacci retracement.

Now having analysed all the multiple time-frames, and assuming that the market sentiment has a bearish bias towards EUR/USD, I will plan a short entry at 1.2689, which is 11 pips below the round number support of 1.2700. Since the trade is based on a daily signal, I will set a more long-term objective at the 78.6% Fibonacci retracement level on the daily chart at around 1.2173 (1.2710 + 3 pips spread), with my stop slightly above 1.2800. Since this is a strong signal and has a huge profit objective, you may wish to set staggered price objectives so that you can take some profit along the way with a few lots at each objective. When the trade moves into a profit of at least 100 pips, we may wish to shift our stop to breakeven, and if it moves even deeper into profit, we may then shift our stop more into profit, or set it to be trailing.

If however you simply wish to trade for just a day or two, you may set a much smaller objective, with a smaller but reasonable stop.

Now let's look at what happened when EUR/USD breached the Double Top neckline and 1.2700 on 12 May 2005.

Daily Chart of EUR/USD weeks after the Double Top neckline breakout

Figure 4

Trading Tips for Multiple Time-frame Analysis

• Analysis of multiple time-frames will take up quite a bit of time. If you can't spare the time to analyze them all, do yourself a favor by not trading because your likelihood of failure will be quite high.
• If you currently only trade off a single time-frame, or if you adopt an intraday trading style using only one time-frame, I strongly recommend you to adopt multiple time-frame analysis so as to increase your chances of a good entry.