Multiple Time Frame Trading

In the arena of active trading, the examination of a financial instrument’s price action over many different frequencies, compressions or time frames is known as multiple time frame analysis (MTFA). It’s a widely practiced method of examining instrument-specific pricing charts and a key aspect of technical analysis as a whole. When executed properly, MTFA can put seemingly random market moves into context and help traders in making more informed trading decisions.

The implementation of MTFA into a trading approach provides distinct functionality and several potential advantages to the active trader:

  • Identification of market state: Trending and consolidating markets can be identified through market study using multiple time frames.
  • Support and resistance levels: Important price levels and the confluence of assorted technical indicators across various frequencies and time frames can become apparent through using MTFA.
  • Refine market entry points: Entering a market at the proper price and moment in time is a crucial aspect of trading. Market entry points in both trending and consolidating markets can be identified through looking at a financial instrument’s price action across time frames.
  • Trade management strategies: MTFA can help traders develop their trading methodology.

MTFA: A Top Down Approach

Multiple time frame analysis is often conducted within the framework of a “top down” approach. Under MTFA, working “top down” implies that longer time periods (larger frequencies) are referenced first, with smaller periods being subsequently used as a means of fine-tuning the market analysis.

It’s important to remember that MTFA can be applied to many different styles of trading, and employ many different time frames, frequencies or durations. Long-term investing, traditional day trading or short-term intraday trading all lend themselves to analysis across multiple time frames.

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The following example illustrates the use of MTFA to examine price behaviour in the pairing of EUR/USD traded on the forex. Assuming that the market participant is analysing EUR/USD on an intraday basis, the following progression is a possible method of using a multiple time frame strategy:

  1. Long-term market state: Yearly and monthly charts for EUR/USD are referenced in an attempt to confirm the presence of an overriding macro trend or market compression. Areas of support and resistance, pivot points and potential breakout zones are identified.
  2. Intermediate market state: Weekly and daily charts of the pairing are examined in much the same fashion as the yearly and monthly charts. Corresponding areas of support and resistance in addition to converging technical indicators between the time frames can be identified.
  3. Current market state: Assorted hour and minute charts are used to observe current market conditions. The predefined long-term market state and key price levels are used in conjunction with hour and minute charts to place intraday volatilities into context. Additionally, the analysis can refine market entry points for traders interested in taking a long- or short-term position in EUR/USD.

Traders and investors exhibit a wide range of trading styles, thus the preferred durations or frequencies used in charting market data may vary according to the adopted methodology. A short-term scalper may prefer using only minute or small-denominated tick charts, while a long-term investor may find that yearly and monthly charts are better suited to achieving investment goals.

Multiple Time Frame Analysis: Trade Execution

Entering the market is a challenging part of active. MTFA can help the trader or investor decide when to enter the market by identifying the following:

  • Momentum: Periodic spikes in pricing momentum. MTFA is useful in evaluating the relative strength of short-term momentum in relation to long-term market condition.
  • Trending markets: Short-term trends may exist in concert with, or in opposition to, a longer term trend. Both trend-following and counter-trend trade setups may be identified through scrutiny of a specific market using MTFA.
  • Optimal trade location: Whether placing a trade with the trend or with short-term momentum, trade location can be greatly improved through implementing MTFA.

Summary

The goal of any trading is accomplished through extensive market analysis and consistent interaction within the marketplace itself. Identifying trending markets, momentum and optimal trade location are products of achieving a broader perspective from which to view the market.

Active trading in the current electronic environment is a fast-paced, dynamic endeavour. Whether one is engaged in the forex, futures or equities markets of the world, MTFA can provide perspective and context while being an invaluable part of nearly any trading plan.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.