The ability to focus on the timing of transactions and maybe predict when trends may be coming to an end is made possible by multi-time frame analysis, also known as multiple time frame analysis. This post will describe how to apply this notion to the EUR/AUD currency pair.
MULTI-TIME FRAME ANALYSIS BENEFITS
Important price response zones are located using pitchforks and median lines, as explained in preceding articles. These similar concepts may be expanded to various time spans to give a more thorough picture of current market tendencies.
Before starting a trade based on a certain setup, the goal is to “see the forest through the trees,” or, to put it another way, to always have a more thorough grasp of where the market is in relation to trend. By examining price behavior over time, we can identify probable entry points inside a given price increase or decline and help with timing these movements.
Look at the daily EURAUD chart up there. The trading of the pair was evidently on a downturn from the 2015 highs, with a descending channel formation highlighting support into the April lows at 1.3678. As discussed in earlier lectures, trendlines that cross significant price highs and lows frequently signal larger areas of support and resistance. The focus now shifts to the immediate future in order to gain greater insight into how we would trade this prospective comeback. In this instance, price is testing support for the downtrend.
Even though a price is at a support level, it does not necessarily follow that it will hold. Prices must first exhibit some sort of behavioral change before we even think about seeking to trade against the wider trend. On the 4-hour chart, there is a short-term downward channel development that is embedded (red). A break over channel resistance would shift the pair’s near-term attention upward and serve as our “trigger” to enter a trade as price swings away from major support.
To identify our topside goals, we might develop an upslope utilizing the most recent low-high-low and an ascending pitchfork formation. The first target of such a trade would be at the pattern’s median line with an emphasis on the topside and above the lower median-line parallel (bisector).
The couple really crossed the down-channel resistance a few weeks later and had since returned to test it as support (long-entry). A few days later, the progress continued into the median-line after a break and rally into the upper median-line parallel. This straightforward illustration shows how examining price movement across several time lenses can be beneficial for identifying trade opportunities within the context of a larger trend (also called primary trend). These patterns frequently contain secondary (or even tertiary) trends that offer quick opportunities to trade the opposite direction of the primary trend.
IMPORTANT CONCLUSIONS OF THE MULTI-TIME FRAME ANALYSIS
Important things to keep in mind while using multi-time frame analysis
- A surplus of time periods has no value. Some people try to schedule their arrival and departure so that all of the time periods match a signal, but this rarely occurs.
- When minimizing the number of timeframes, utilize a ratio of 1:4 to 1:6 between the trigger and trend periods. If you are trading off the four-hour chart, for example, glance at the daily chart for trend analysis. If you’re looking for a trade-off from the one-hour, look at the trend analysis on the four-hour chart.
- Recognize when you are trading against the trend – As in the case of the EURAUD example above, the near-term view frequently offers settings that are the opposite of the major trend. It’s important to manage these trades carefully, which means employing less leverage and sensible stop losses.
The use of multi-time frame research allows traders to focus on choosing the best time to conduct trades and may also help them predict when a trend may be coming to an end. If the EURAUD had stayed inside the confines of the formation of a short-term falling channel, no efforts would have been made on the long side in the preceding example. In a similar spirit, if we hadn’t viewed the trade in the context of the wider trend that was highlighted on the daily chart, we might have missed the turn entirely. This should always be kept in mind when trading, and you should always look for short-term price movement to provide time and price triggers.