Before we go into how to do various time frame analysis for forex trading, we think it’s important to clarify why you should do it in the first place.
After all, isn’t it difficult enough as a forex trader to evaluate only one chart?
Let’s look at the GBP/USD 10-minute chart at 8:00 a.m. GMT.
On the chart, we see the 200-period simple moving average (SMA), which appears to be acting as resistance.
With the price testing resistance and forming a doji, now appears to be a good moment to short, right?
That’s a yes from us.
But wait till you see what happens next!
The pair closed above resistance and gained an additional 200 pips!
Ouch! Oh well, that’s too bad!
What in the world happened? Hmm, let’s take a look at the 1-hour chart to see what happened…
If you looked at the one-hour chart, you would have observed that the pair was at the bottom of the ascending channel.
Furthermore, a doji had developed directly on the support line! A strong purchase signal!
The ascending channel would have been even clearer on the 4-hour chart.
Would you have been so eager to go short when trading on the 10-minute chart if you had first looked at this chart?
All of the charts displayed the same price data. They were simply various time periods of the same data.
Do you see the significance of considering multiple time periods now?
We used to trade solely off of the 15-minute charts.
We never understood why, when everything appeared to be going well, the market would abruptly stall or reverse.
It never occurred to us to look at a longer time period to understand what was going on.
When the market stalled or reversed on the 15-minute chart, it was usually because it had reached support or resistance on a higher time frame.
It took a few hundred pips to realize that the larger the time frame, the more probable an important support or resistance level would hold.
Trading with several time frames has probably saved us from more bad transactions than any other single factor.
It will assist you to continue in a trade for a longer period of time since you will be able to determine where you are in relation to the BIG PICTURE.
Most beginners just consider one time frame.
They select a certain time frame, apply their indicators, and ignore the rest.
The issue is that a new trend from another time period frequently damages forex traders who do not consider the big picture.