Multiple timeframe analysis follows a top-down approach to trading: allowing you to analyse longer-term trends to find ideal entry points on a smaller timeframe.
In a general sense, timeframes help traders analyze patterns and trends over a certain period. They can also identify market movements, both uptrends and downtrends. After choosing which timeframes to analyze, you can then use technical analysis to strategize your next move.
In this article, we will discuss everything you need to know about multiple timeframe analysis:
What is a timeframe in Forex trading?
A timeframe is the unit of time that price charts are based on. For example, if we have a price chart in a daily timeframe, it represents the different price points of the currency pair in a day.
When traders expand the timeframe to a week or a month, it helps them look at the bigger picture and identify long-term trends in the foreign exchange market.
What is a multiple timeframe analysis?
In a multiple timeframe analysis, you can view the same currency pair under numerous timeframes. Hence, if you are trading EUR/USD, you can view the price movement of this pair in an hourly, daily, and weekly timeframe to understand how volatile its price movement is in different time periods.
In a larger timeframe, like weekly or monthly, you can identify long-term trends to make informed decisions while weighing market sentiments. However, a shorter timeframe is used by traders to spot ideal entry or exit points in the market with immediate effect.
Steps to multiple timeframe analysis
Let us create a hypothetical situation where you want to trade EUR/USD. The 15-minute chart may seem too fast, and the 4-hour chart may seem too vast to be carefully analyzed. In this case, the 1-hour timeframe seems to do the trick.
NOTE: It is best to view at least two timeframes. Looking at more than three timeframes is not recommended for beginners, as they can confuse you instead of helping you.
Step 1: To find a middle ground between the 15-minute and the 4-hour chart, you can look at the 4-hour chart of EUR/USD to determine the overall trend.
Step 2: If the chart shows an uptrend, it is a sign that you need to look for buy signals.
Step 3: After analysing the 4-hour chart, go back to the shorter timeframe where you will conduct your trade. In this case, the 1-hour timeframe.
Step 4: To dig deeper and find an ideal entry point, you can move towards the 15-minute timeframe and even use a technical indicator like the RSI.
Step 5: Upon analysing the 15-minute chart for EUR/USD, let's say you’ve figured out that the trend is going strong. The RSI also shows that it is being oversold, which means that the market has a high chance of dipping further in the short run. This gives you the ideal entry point signal for the given currency pair.
Step 6: After buying EUR/USD, the uptrend continues and the EUR/USD prices rise. Congratulations! Analysing multiple timeframes just helped you reap higher profits.
Top tips in analyzing multiple timeframes
Don’t just stick to a top-down approach
The top-down approach is not the only approach that you should stick to. It is recommended to stay on the timeframe you are most comfortable with, and just zoom out from there to get a closer look at the bigger picture. Zooming out multiple times a day gives you greater context and helps you make informed trading decisions.
Go long and go short
Dealing with both long and short trades with multiple timeframe analyses lets you become a more effective trader. It helps you avoid one-dimensional thinking because when you only have a short trade, you end up ruling out all long trade signals. On the other hand, if you only have long trades to focus on, you are more likely to miss trends signalling a reversal that could benefit you later.
Identify the right timeframes that fit your needs
Always start by identifying different timeframes that suit your trading style:
- If you are a scalper, a 15, 10, and 1-minute chart will fit your trades best.
- For day traders, a daily, 4-hour, or hourly chart would be the best for you.
- If you are a swing trader and wish to hold currencies for a few days, then an hourly, a 4-hour, or a daily chart are the best picks for multiple timeframe analysis.
- Last but not least, for position traders who hold their trades for several weeks or months, a monthly, weekly, or daily chart would be most suitable.
Start effective trading with multiple timeframe analysis
Analyzing and reading multiple timeframes to understand the price movement of currency pairs can help you make informed decisions about your trade. When the charts are clear and easy to understand, you are able to make effective buy and sell decisions more quickly.
Our trading platform provides you with various charts which you can view in up to 21 timeframes to ensure that every trade position you open is backed by careful analysis of the Forex market. Create an account and start trading more effectively with multiple timeframe analyses by clicking here.
Disclaimer:
- All material published on our website is intended for informational purposes only and should not be considered personal advice or recommendation. As margin FX/CFDs are highly leveraged products, your gains and losses are magnified, and you could lose substantially more than your initial deposit. Investing in margin FX/CFDs does not give you any entitlements or rights to the underlying assets (e.g. the right to receive dividend payments). CFDs carry a high risk of investment loss.
