Best TimeFrames For Trading Forex ?

How To Perform A Multiple Time Frame Analysis   ----EXCELLENT & MOST IMPORTANT

• Top-down vs. bottom-up – the biggest mistake of multiple time frame analysis
• Multiple time frame analysis helps you stay open-minded
• Multiple time frame analysis – step by step
  • Weekly / Monthly  – Where are we?
  • Daily – Strategic time-frame
  • 4H (1H) – Execution
• 
  

Most traders pick their one time-frame and then almost never leave it. Or they just leave their time-frame to go down to lower time-frames to find more trading opportunities – which basically means they are recklessly hunting for signals on time-frames they shouldn’t be on.
The professional trader knows that the only way to approach trading is with the top-down approach and you’ll shortly see why.

Top-down vs. bottom-up – the biggest mistake of multiple time frame analysis

The biggest mistake traders make is that they typically start their analysis on the lowest of their time-frames and then work their way up to the higher time-frames.

Starting your analysis on your execution time-frame where you place your trades creates a very narrow and one-dimensional view and it misses the point of the multiple time frame analysis. Traders just adopt a specific market direction or opinion on their lower time-frames and are then just looking for ways to confirm their opinion. The top-down approach is a much more objective way of doing your analysis because you start with a broader view and then work your way down.

! Tip: Doing a multiple time frame analysis while you are in a trade can be a real challenge because of the trade-attachment. Once in a trade, the supposedly objective performance then turns into justifying your trade. Especially when you are in a losing trade, you have to be very aware of how you are doing your analysis; avoid justifying a (losing) trade based on the “bigger-picture” market view.

Multiple time frame analysis helps you stay open-minded

Obviously, the daily time-frame is less important if you are trading off the 1 hour time-frame. However, a trader who never leaves his execution time-frame has a very narrow view on the market and cannot put things into the right context.
Every trader, regardless of his main time-frame, should has to start his trading day looking at the higher time-frames to be able to put things into the right perspective. But looking is not enough because once you arrive at your lower time-frame and are in the midst of your trading session, you will have forgotten what you saw on the higher time-frames. There are two ways to deal with this problem:
1) Get a physical notepad
On your trading desk, place a physical notepad and for every market you trade, write down what you saw. We also offer a free trading plan template that can help you stay organized.

2) Annotate your charts
All charting platforms offer text objects and you can use them to directly write on your charts. It is also advisable to mark the areas on your chart that are your areas of interest. This way you are less likely to jump the gun and enter prematurely.

Multiple time frame analysis – step by step

When it comes to actually performing your multiple time frame analysis, you don’t have to get too fancy. But knowing what to do and how to approach it can help you build a time effective routine that guides you through your trading sessions.

Weekly / Monthly  – Where are we?

If you mainly use the 4 hour or 1 hour time-frame to execute your trades, you don’t have to spend too much time here. Basically, you just want to get a feeling for the overall market direction and if there are any major price levels ahead. Especially long-term support and resistance or weekly or annual highs and lows should be marked on your charts

Daily – Strategic time-frame

On the daily time-frame, you have to spend a bit more time on. Here you analyze the potential market direction for the week ahead and also determine potential trade areas. Again, draw your support and resistance lines and mark swing highs and lows – even if you don’t use them in your trading, it is worth having them on your charts because they are so commonly used.

4H (1H) – Execution

Assuming that the 4 hour is your execution time-frame, this is where you map out your trades and specific trade scenarios. Take the levels and ideas you came up with on the daily time-frame and translate them into actionable trade scenarios on the 4 hour time-frame.

Ask yourself where you would like to see price going, what has to happen before you enter a trade and what are the signals you are still missing.

Staying open minded – 2 tips

Always create long and short trade scenarios when doing your multiple time frame analysis. This will keep you open-minded and it avoids one-dimensional thinking. A trader who is only looking for short trades, will blank out all signals that point to a long trade. Or, a trader on a long trade will miss the signals that could signal a reversal.
Furthermore, separate your charting from your actual trading platform. If you can see your open orders on your screens during your analysis, you are much more likely to be biased during the analysis.

Here is a live example of a multi timeframe analysis:


Image credit: https://www.tradingview.comace very much attention on the actual time frame that they intend to trade or how long they intend to hold a position for. They may set a stop loss and take profit order levels, but otherwise have no particular time frame in mind for closing out their position.

This article will delve into the topic of what the best time frames for trading in the forex market are. It will also explore how the answer to that question may vary depending on the primary type of trading strategy you prefer to employ to manage your trading activities with.

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The Three Basic Trading Time Frames

Most traders and analysts will agree that trading time frames can be broken into three broad categories. These time frames are typically known as the short, medium and long term time periods.
The first thing that seems important to note about this terminology is that each of these time frame categories does not have a precise definition among forex traders, other financial market participants and authors.  
Perhaps the best way to explain this variation is that the time periods these commonly used terms refer to tend to depend on the usual time a position is held given the type of trading strategy that a trader employs.
Hence, if a trader uses a trading strategy that tends to have a relatively short holding period, like a day trading strategy, for example, where all positions are closed out prior to the end of the trading day, then the length of time associated with each time frame term will be proportionally shorter than the length of time for a swing or trend trader, for instance, who might hold positions for a considerably longer period.

Forex Time Frames by Trading Strategy

Although trading time frame terminology is not especially precise, it can nevertheless help to get a general understanding of what phrases like long term, medium term and short term actually mean to traders who use different trading strategies.
For example, the time period that each of these categories tends to cover that is most relevant for day traders, who generally seek to close out trading positions the same day they were initiated and so do not usually hold positions overnight, can be described as follows:

• The Long Term – This time frame for a day trader covers a period lasting from several hours to an entire day session.
• The Medium Term – This time frame for a day trader covers a period lasting from ten minutes to around an hour.
• The Short Term – This time frame for a day trader covers a period lasting from seconds to several minutes in duration.

In contrast, swing traders are those who look to take advantage of bigger fluctuations in market exchange rates. They are usually more than fine with holding positions overnight.
The time period each of these time frame categories tends to cover that is most relevant for swing traders can be described as follows:

• The Long Term – This time frame for swing traders covers a period lasting from several months to a year or more in duration.
• The Medium Term – This time frame for swing traders covers a period lasting from several weeks to a month or so.
• The Short Term – This time frame for swing traders covers a rather brief period lasting from a few days to a week or so.

Finally, those engaged in long term foreign exchange trend trading or foreign currency investment activities tend to have a much lengthier time frame that they are willing to hold positions for.

• The Long Term – This time frame for trend traders or investors covers a period lasting a few months to more than a few years in duration.
• The Medium Term – This time frame for trend traders or investors covers a period lasting from several weeks to as long as a few months.
• The Short Term – This time frame for trend traders or investors covers a period lasting a few weeks.

A List of Common Forex Trading Time Frame and Analysis Options

When a technical forex trader is analyzing exchange rate data for a particular currency pair, they will often view this information in the form of close, bar or candlestick charts that are plotted at several different time frames or intervals.
These intervals of time are also sometimes called time frames or periods, and analysts tend to select a range of multiple time frames in order to be able to assess the currency pair’s short, medium and long term trends and other price action behavior with associated time frames appropriate for their own trading strategy.
Below is an example of a typical series of three exchange rate charts for the USD/CHF currency pair covering short, medium and long term time frames that might be suitable for a swing trader are shown below in Figure 1.

Figure 1: Three candlestick exchange rate charts for USD/CHF plotted using time intervals of one hour, four hours and one day. The RSI is shown in the indicator box below in pale blue, while the 200 day moving average is superimposed over the exchange rate in red.

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Some of the most common incremental time frames used by technical analysts when reviewing exchange rate movements for forex currency pairs include the following:

• The one minute time frame
• The five minute time frame
• The fifteen minute time frame
• The thirty minute
• The one hour time frame
• The four hour or 240 minute timeframe:
• The one day or daily time frame
• The one week time frame
• The one month time frame
• The one year time frame

In addition, some very short term traders like scalpers might look at tick charts, which do not have a particular fixed time interval between data points. They instead show a new data point every time a certain number of trades take place or some other measurable criteria is fulfilled.

Traditional Trading Timeframes for Forex Strategies

A number of different strategies with varying timeframes are typically employed by forex traders. These strategies can be profitable depending in large part on the plan the trader has devised to govern their activities, as well as on the trader’s level of discipline in adhering to the specific rules in their trading plan.
The timeframes for holding positions in the strategies to be mentioned below vary from less than a minute for scalp trading, to weeks or even months for long-term trend trading. Swing and range trading time frames can vary depending on market movements, although positions are often liquidated within several trading sessions.
As the name implies, those using a day trading strategy customarily liquidate their positions by the end of the trading day. The ending time of which is specified in advance due to the forex market being open 24 hours a day throughout the trading week that starts on Sunday afternoon with the Auckland, New Zealand open and runs until the New York close on Friday afternoon.
In addition to scalping, swing trading, range trading and trend trading, another type of strategy consists of news trading. News traders typically use fundamental analysis for the objective of profiting from market volatility seen after major news announcements.  For example, the volatility that news traders thrive on might depend on the results seen for the release of a nation’s economic data, as well as the outcome of macroeconomic or geopolitical events that directly affect the valuation of that nation’s currency. 

Trading Strategy Time Frames

What follows is a list of the more popular trading styles and their respective trading timeframes:

• Scalping – The market adage, “long term is noon” aptly describes the scalping trader’s approach to time spent in the market. Scalping is a strategy that is often popular with market makers, since they can quickly offset the risk of positions they receive from customers at advantageous rates due to the bid/offer spread they quote. They can also take small profits by simply quoting prices to other market makers and via professional forex brokers. Other scalping traders consist of proprietary desks and retail traders with access to very tight market spreads and who pay very low per trade commissions, if any.

The timeframe for scalp traders is generally very short, since traders liquidate positions as soon as they make a small profit. Conversely, if the market is moving against them, successful scalpers tend to take their losses just as fast.

• Day Trading – This short-term trading strategy requires that the trader only take positions during their pre-determined trading day, which would typically be specified by the trader ahead of time in their trading plan. By the end of their trading day, the day trader would generally need to flatten out all of their positions regardless of their profit or loss.

The timeframes relevant for day traders generally range from several minutes to several hours, depending on market dynamics and the trader’s objectives. Day trading is popular among many traders in the forex market, as it allows the trader to have no open positions to worry about overnight.

• Range Trading – As its name implies, this type of strategy is based on trading ranges. Such patterns are identified using technical analysis methods and based on the establishment of clear levels of support and resistance on an exchange rate chart. Once the levels of supply and demand are identified by the trader, they then initiate and liquidate positions according to these levels, buying at levels of support and selling at levels of resistance.

The timeframe for range traders varies widely and can be from a few hours to extending into the following trading session and beyond. Once a position is established at the lower or higher end of a range, the trader then needs to either wait for the position to go to the target level, or conversely take a loss if the position has gone in the opposite direction.

• Swing Trading – this strategy typically involves using technical analysis for the intermediate term to determine entry and exit points on a chart and subsequently establishing positions based on this analysis.

Much like the range trader, the swing trader’s timeframe typically varies from a few days to a week or so. Many swing traders try to exploit multi day price patterns in the market.

• Trend Trading – the longest-term of the trading strategies, trend traders identify the overall trend in the market, establish a position and wait for the trend to play out. The trend trader can be a technical analyst buy may also look at underlying currency market fundamentals to establish their criteria for establishing a forex position.

Typically, currency trend traders look for long term trends and relative movements in benchmark interest rates. It can take several weeks to months or even years for the trend they have identified to fully unfold before liquidating their positions when they think the time is right. Although taking this long term trend following perspective can involve increased risk of prolonged drawdown periods, successful trend traders are some of the highest earners among forex traders when the conditions are right.

Choosing the Best Trading Timeframes

Selecting the best time frame to trade forex will really depend on the trader’s level of experience, the type of trading strategy they employ, and how they approach the forex market.
While most novice traders tend to shun the approach, at least initially, taking a swing trading or long term outlook is generally recommended for newer traders, especially since their reaction times tend to be longer due to their relative inexperience in the market.
Although beneficial, another reason for the reluctance among novice traders to consider longer term strategies is that most novice traders tend to be impatient and may equate “long term” with having to wait for profitability. Nevertheless, the truth of the matter is that short-term trading is considerably more difficult and usually takes the trader quite a long time to master since they need to evolve their reactions and emotional states to the point where they can be successful.
New traders therefore should consider beginning to trade with a longer term outlook, since this will also generally reduce their trading frequency and teach them the importance of operating strategically. Once their trading methods have proven successful, they can then move on to dealing in the shorter time frames is they wish. 
Furthermore, many profitable traders who use technical analysis will review charts that represent several different time frames when approaching a relatively new currency pair to get a sense for the short, medium and long term picture for that pair. And so regardless of the preferred trading time frame, using a multi time frame analysis approach is always recommended.
Novice traders must also be made aware that the shorter the time frame they trade in, the more market volatility they can experience. The incidence of trading mistakes also tends to increase with trading frequency and the need for quick reaction times. Trading higher time frames also tends to reduce the impact that short term exchange rate variability or noise has when it comes to taking advantage of the overall market trends, which can in turn increase the potential for steady profits if positions are managed appropriately by the trader.
When using a long term strategy, the trader can use a weekly chart to establish the long term trend and use the daily or 4 hour chart to better time the initiation of positions. Until this longer timeframe analysis is mastered, a novice trader should generally avoid trading the shorter time frames. As the trader gets used to dealing with increased market variability associated with the shortening time frames, they can become more experienced in trading the forex market.
For day trading, scalping and other forms of extremely short term trading, many traders use the fifteen minute, five minute, and even one minute or tick charts. Market volatility and trading frequency tends to increase significantly as the trader operates in these shorter time frames, often requiring more focus and concentration. Taking frequent small profits and exiting the market the moment one recognizes they are on the wrong side are part of the basic mindset needed to succeed at very short term trading, which can be quite challenging to say the least.

Why Forex Daytrading is Such an Uphill Battle

February 19, 2017 Forex Trading Articles

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Many people new to forex trading seem to gravitate initially toward operating largely on an intraday basis, which is commonly known among traders as day trading.   There are a number of popular trading strategies that are used by day traders, but due to the inherent nature of day trading, many of these strategies do not provide a positive edge in the long run.

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Though there are several advantages to using this sort of short term trading timeframe, the overwhelming shortcomings make day trading an uphill battle for most who engage in this type of trading related business. 
For example, a number of traders find they are not emotionally suited to the various stresses of day trading, or they may be unwilling or unable to devote sufficient time to make their day trading program successful. Many newer day traders also find out the hard way that their dreams of getting rich quick trading currencies are unrealistic.
Becoming a day trader may seem attractive at first glance, but it really makes sense for a novice trader to take a good look at what they will be doing as a day trader and assess both their probability of success and whether or not day trading will suit their desired lifestyle.
The next sections of this article will discuss various key aspects involved in day trading currencies and will describe how you can stand a better chance of winning against the adverse odds that many newer forex day traders will face as they enter into the market.

Pros and Cons of Day Trading Forex

Choosing a day trading strategy definitely has its advantages and its disadvantages for the average forex trader. Before attempting to develop a day trading strategy, it would make sense to review these pros and cons and get a sense for whether you can tolerate the negatives in order to obtain the positives for your currency trading business. You may also want to research what day trading strategies have been used in the past by some successful day traders who have been willing to make their methods public.
First of all, here are some of the more favorable reasons why day trading might make sense for someone interested in trading currencies:

• Reduced market exposure – Taking a position for brief periods throughout the trading day when you are able to focus on market developments means you do not have to bear the extra risk of holding positions overnight. Overnight risk exposure can be very costly since they may not just result in the triggering of stop loss orders, but also in significant order slippage.

• Shorter drawdown periods – Most traders using a system discover that they will suffer a string of losing trades from time to time. Since the number of trades involved in an unsuccessful run like this tends to be similar, a day trader will generally come out of their trading slump much faster than a long term trader. Having a shorter recovery period from drawdowns can be especially important for those who are trading to make a living.

• Rapid gratification – Day traders quickly know whether their trading decisions were right or wrong. This can suit more impatient people who often like to know, relatively quickly, whether their trade was a winner or loser.
• Higher activity levels – Traders who get a thrill from trading and like to keep active often find that regular day trading provides them with a higher level of trading involvement that they enjoy most.

• Simple decision making – Many day traders use simple decision making methods as a matter of necessity since they need to make quick decisions on whether to enter or exit the market.

On the other hand, choosing a day trading strategy can also have its downside, which include the following disadvantages:

• Higher trading costs – Day traders tend to enter into more transactions than longer term traders do since they enter and exit the market throughout the trading day. Since each transaction involves paying away the dealing spread and perhaps even broker commissions, these costs can really add up and reduce the overall profitability of your trading business.

• Greater impact of order slippage – Since a day trader will usually be more active, they will also tend to have more stop loss orders executed. This means that they generally stand a greater risk of experiencing slippage on those order levels when the market gaps through their levels so the stop losses cannot be executed as planned.

• More trading activity involved – Day trading systems usually execute more transactions, so some people find that having to spend the time making more trades means having less time available for other things they might enjoy doing in life.

• Greater focus required – Since day traders typically look for opportunities to enter and exit the market throughout the day, this means they will often need to watch it more carefully and spend more focused time on market activity.

• Need for fast decision making – In order to take advantage of smaller intraday market movements, day traders usually need to make simpler and faster decisions than longer term traders. This requires fast thinking and responses that might create more stress for a trader.

• Higher cost of market monitoring software and newswire services – Day traders generally need to keep their fingers on the pulse of the market. This often means investing in costly systems that allow them to monitor the market and relevant financial news in real time.

The above pros and cons represent some of the key considerations you will need to take into account when determining whether or not using a currency day trading strategy is going to be suitable for your personality and preferred lifestyle choice.

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The Most Liquid Day Trading Currencies

The foreign exchange market is the largest and most liquid financial market in the world, so it has a lot to offer the average day trader. The major currencies that tend to see the most active forex market trading volumes are:  the U.S. Dollar, the Eurozone’s Euro, the Japanese Yen, the British Pound, the Australian Dollar, the Swiss Franc and the Canadian Dollar.  The New Zealand Dollar is also quite popular with currency speculators. 
The pie chart diagram shown below displays the relative distribution of each major currency in terms of its turnover as a percentage of the total turnover based on information provided by the Bank for International Settlements in April 2010.  One notable thing that really stands out from this image is how important the U.S. Dollar and the Euro are, thereby making the EUR/USD currency pair that involves both of them one of the most liquid currency pairs for day trading. 

Figure 1: Pie chart showing major currency turnover in percentages as of April 2010 based on data provided by the Bank for International Settlements.  Note that the total of the percentages shown add up to 200 percent since each forex transaction involves two currencies.
Not only will day traders want to focus on the more actively traded currencies, but they will also want to choose the most active currency pairs, since all trading in the forex market occurs in pairs. Basically, since day traders tend to trade more actively, minimizing their transaction costs typically becomes very important to the success of their strategy.
As a result, day traders will usually want to operate solely in the most liquid forex currency pairs since the dealing spreads are generally tighter and the presence of more market makers means potentially costly pricing gaps and order slippage will typically occur less frequently.
The following table first lists the most active and liquid currency pairs involving the U.S. Dollar that are commonly known as the “majors”. Most day traders will want to confine their dealing activities to these seven currency pairs. Below the majors, the table also lists the major currency crosses that day traders can sometimes also find enough liquidity in to operate comfortably.
Table 1: Displays the most liquid currency pairs traded in the forex market that would be most suitable for a forex day trader.

Choosing Among Daytrading Brokers

Once the exclusive realm of large financial institutions and professional traders, day trading has become available to speculators of any size through online forex trading. A major consideration in selecting a day trading broker is their reputation and trustworthiness. 
A broker that is overseen by a reputable regulating agency such as the Financial Conduct Authority in the UK and CySEC in the European Union is a criteria that should be at the top of the list. The National Futures Association oversees brokers that do business in the United States.
The next important consideration is security. Ideally, the broker one chooses should have secure SSL encryption to receive and transmit your personal financial information. A broker that does not encrypt your information is putting your information at risk of data theft.
Next on our list are commissions and the cost of doing business as a day trader. Typically, online forex brokers receive their commissions from the bid/offer spread, therefore, the tighter the dealer spreads on currency pairs, the more cost effective your day trading will be. In the case of a commission per transaction, these costs can add up quickly depending on how actively the account is traded. 
In addition to the above considerations, the broker’s trading platform should be easy to navigate and use, since day trading involves the need to make quick decisions. Also, a broker’s account types and customer service should be considered when selecting a broker for day trading.

How to Make Money Day Trading

The answer to question about how to make money day trading really depends on the individual and the way that the trader implements their trading plan. Many day traders are extremely active when they trade, often initiating and exiting positions within seconds in some cases. Other day traders position themselves at a certain level of a currency pair using limit orders, and then take their time in closing out the position sometime later on the same trading day.
While large sums can be made trading in the forex market, one should never lose sight of the fact that these large sums can turn into losses in seconds in a volatile market. The conditions in the forex market can rapidly turn from a peaceful range trading environment to an extremely volatile one. Knowing when to exit a trade can be challenging for any trader.  
Basically, making money day trading depends entirely on the quality of a trader’s trading plan, how well it is implemented in practice, and the trader’s discipline in adhering to their own rules. Day trading becomes even more challenging when a trader comes into the market each morning unprepared. 

Some Popular Forex Day Trading Strategies

While many day traders initiate positions in a forex currency pair and exit them as soon as they are profitable, another popular trading strategy consists of hedging. 
In a hedge strategy, a trader either takes a position which offsets the original position in the same currency pair, takes a position that reduces risk in another well correlated currency pair, or takes an offsetting position using currency options.
The first type of hedged trade example is for the trader to take an opposite position in the same currency pair. This strategy can only be implemented from a brokerage account that is not based in the United States. U.S. securities law prohibits holding two offsetting positions in the same account.
The second type of hedged example is for the trader to take an opposite position in a well correlated currency pair. The second currency pair trade will ideally move inversely to the original position.
A third strategy involves using currency options to hedge the position. This strategy provides a number of different ways to hedge the original forex currency pair position.
Once established, the hedge can be traded out of by liquidating its individual components or “legging out” of the position. Ideally, the position’s profit side will be higher than its losing side. Nevertheless, even if the original hedge is a losing trade, the position can be liquidated for a profit if the trader “legs out” of it in the right way.
Another very short term day trading strategy is known as scalping, where a trader will often quickly move in and out of the market in seconds aiming for a few pips profit.

Developing Successful Day Trading Systems

Developing a day trading system depends in large part on the trader’s analysis background. Technical analysts will generally use chart points and levels of supply and demand to determine exit and entry points.
Technical day traders rely on a number of indicators and signals that will alert them as to when to enter or exit a trade. These signals consist of oscillators, momentum indicators and in some cases, volume figures, as well as levels of support and resistance in the currency pairs traded.
Developing a technical day trading system involves selecting the most relevant signals and taking action once these indicators come into line with the trader’s criteria for initiating or liquidating a position.
Fundamental day traders generally rely on economic releases that are listed in a nation’s economic calendar. Important releases, such as a nation’s GDP, employment numbers or action taken by a country’s central bank can increase the volatility in a currency pair, which is generally the best trading environment for day traders.

Using Day Trading Signals

Knowing when to initiate or liquidate positions is the most important consideration for a day trader or for any trader really. A forex day trader hopes to gain an edge in the market by following signals provided by their trading strategy which is derived from market conditions during the trading day.
An overbought/oversold oscillator is a simple example of a technical day trading signal that can be used. When a currency pair reaches an extremely oversold condition, the commonly observed market reaction is generally that of a corrective rally. By using this signal, a trader would initiate a long position in the currency pair at the oversold level while expecting to profit from a correction to the oversold condition. The inverse is true for an overbought condition in the currency pair.
Nevertheless, one should be aware that just because a currency pair has become oversold, it does not necessarily mean that a rally will inevitably ensue. Depending on underlying economic and geopolitical conditions, the oversold condition could remain for quite some time as the currency pair continues to decline over a prolonged period.
Other day trading signals include the currency pairs opening and closing ranges for the different trading sessions, such as the Asian, European or American sessions. Fundamental economic releases can also be day trading signals, with positive or disappointing results generally moving the market on a currency pair. 
Overall, the best day trading strategies to use will really depend on the trader, their trading plan, their account size, and how they implement and take action once they have established a trading position. 
In any case, regardless of the strategy employed, aspiring day traders need to be aware of the pitfalls involved in day trading which makes it extremely difficult to gain and keep a positive edge in the long run.

Using Multiple Time Frame Analysis to Enhance Trading Success

April 11, 2016 Forex Trading Articles

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Using Multiple Time Frame Analysis to Enhance Trading Success

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Most traders often make their trading decisions based exclusively on a single timeframe. They spend all their energies in analyzing the technicals on their trading time frame without giving much thought to what may be happening in the “Bigger Picture” timeframe. And that can work fine in some cases, however, a more robust approach would entail looking at several time frames in order to get a better handle on the potential viability of a trade setup.

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For the average trader multi time frame analysis can seem a bit overwhelming and even confusing at times. One of the major reasons that traders avoid multi time frame analysis is due to the conflicting information that sometimes results from this approach. This confusion causes many of these trader to suffer from “Analysis Paralysis”. So in this lesson, we are going to discuss the correct way to view multi time frame analysis, an how to correctly implement it into a trading methodology.

What is Multiple Time Frame Analysis?

Multi time frame analysis is an analytical concept in trading which proves to be quite powerful when utilized properly. The idea is to observe different time scales on the same instrument being analyzed to identify market behaviors and trends on those timeframes which would help us to recognize what is happening on those time frequencies. Usually we are looking for information from the higher time frame to help guide our decision process on our trading time frame.
Seasoned traders understand the benefit of multi time frame analysis, and they will usually segment their analysis into three distinct time horizons, the trading time frame, the bigger picture time frame, and the signal entry time frame.
Multi time frame analysis can help a trader to simultaneous increase their probability of success on a trade and minimize the risk exposure. It is an extremely effective trading concept which can be applied to the analysis of any liquid financial instruments including forex, futures, stocks and options.
While there are many new and fashionable trading techniques that are popping up all the time, there are some concepts such as support and resistance, price action and multi time frame analysis which are timeless in nature. They have worked in the past, they will work in the present, and will continue to work in the future, because they are based in market logic.
Using three different time frames provides the best combination for reading the market action. The first time frame to consider is the trading time frame. This is the time frame that traders are used to spending most of their time on. They will hyper focus on this timeframe alone, expecting all the answers to lye here. 
The second timeframe that a trader must consider is the higher level time frame. This is usually magnified by 4x – 6x the trading time frame. For example, if your trading timeframe is the 240 minute chart, then your higher time frame should be the Daily chart. This time frame provides a trader with the “Bigger Picture” view. You would use this time frame to check major support resistance levels, and the overall trend direction.
Lastly, we have the smaller timeframe. This timeframe is 1/4x – 1/6x the trading time frame. As per our example earlier, if your trading time frame is the 240 minute chart, then your smaller timeframe would be the 60 minute chart. The purpose of the smaller timeframe is to be able to time your trades for optimal entries. We typically zoom on this timeframe only after we have confirmation of our trade setup on our trading timeframe and the higher timeframe.
As you know, there is no trading methodology that will provide answers to all of our questions, so it is with Multi time frame analysis as well. There will always remain uncertainty. The modern markets are quite efficient and therefore, as traders, we must try to gain every edge that we can in order to stay ahead of the curve.
Multi time frame analysis provides you with a means by which you can improve your statistical trading edge. A key concept in trading is to always try whenever possible to trade with trend. But the question is which trend? And that’s what multi time frame analysis helps you to answer. In addition, our trading edge can be improved further thru better market timing and that’s another benefit that can be gained thru proper multi time frame analysis.

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Top Down Approach Advantage

So now that we understand what Multi Time Frame analysis is and recognize the benefits that it offers, let’s move to discussing the correct way to implement this approach.
We know that we should be segmenting our analysis into 3 different timescales, our trading timeframe, our bigger picture timeframe, and our trade entry timeframe. I think many traders understand this, but where many of them go wrong is in the mechanics of how they analyze these three timeframes.
Instead of using a Top Down approach, many traders incorrectly apply multi time frame analysis by using a bottom up approach. This is one of the biggest mistakes I see novice forex traders making as it relates to the multi time frame approach. For example, let’s take Fred, an aspiring forex trader who understand the importance of multi time frame analysis, and so he has incorporated this approach within his trading plan In his plan he has clearly outlined that he will use the daily chart for his big picture analysis, the 4 hour chart for his setups, and the 60 minute chart for fine tuning his trade entries.
Now as Fred starts his trading day with a fresh cup of coffee, he is toggling back and forth between the 1 hour charts and the 4 hour charts, and sees an interesting pattern emerging on the 1 hour chart in the EURUSD, so he consults the 4 hour chart and everything seems to look okay, and then he finally consults the daily chart, where he doesn’t seem to find anything that would prevent him from taking the 1 hour chart pattern.
You see the mistake that Fred is making here? Well there are several, but let’s start with the first. The first mistake is that Fred is taking a setup from the 60 minute chart. There is nothing particularly wrong with that, but per his trade plan, he is only to use the 60 minute chart for timing purposes. His setups should be taken from the 240 minute time frame. So Fred is acting contrary to his trading plan, whether intentionally or inadvertently.
Now the second mistake that Fred is making is that he is taking a bottom up approach rather than a top down approach. Instead of starting with the Higher Time Frame chart, and then referring to the trading timeframe chart, and then to the timing entry chart, he is doing the exact opposite!
What is the problem with this you ask? The problem is that when you start with a bottom up approach, you will tend to adopt biases at the lower timeframe and then look to the higher ones only to confirm or justify your opinion. This produces a very myopic single dimensional view that entirely misses the point of proper Multi time frame trading analysis.
On the other hand, a top down approach is a much more objective way to perform your analysis. You essentially begin with a broader view and work your way down to the lower time scales. In Fred’s case if he were applying the Multiple time frame trading approach correctly, he should have started with the bigger picture chart which was the Daily chart, where he would have formed some opinion on the overall direction of the market,  worked down to the 4 hour chart, where he would be looking for his setups in conjunction with his bigger picture bias, and only if and when his setup was present on the 4 hour, would he even consider consulting the 60 minute chart, and that would be for the purpose of fine tuning his trade entry.

Exploring the Different Time Frames

So now that we understand the importance of using a multi time frame approach, and the proper way to utilize it, the natural question becomes what are the actual timeframes that we should be looking at. The answer to that is, it varies, based on your trading style and time horizon.  First you have to define your trading time frame, and from there you could extrapolate your next higher and next lower timeframe. 
If you are an intermediate term forex trader, it would be appropriate to look at the daily charts for your signals, the weekly chart for your big picture view, and the 4 hour chart for fine tuning your entries. If you are more of a swing trader, like I am, then you would want to concentrate on the 240 minute chart for your signals, the daily chart for your big picture view, and the 60 minute chart for executing your entries. And to clarify what I mean by swing trading in term of time horizon, I am referring to trades that will last anywhere from 1 day to about a week or so.
I’ll break down the different time frames and their importance in my overall trading as a swing trader.

• Monthly Chart

As a swing trader, I am looking to exploit short term moves in the market, and as such the monthly chart is too far outside my relevant trading time frame to be useful, so I rarely refer to it in my shorter term swing trading positions. So for my big picture view, I refer to the shorter time frame of the weekly chart.

• Weekly Chart

This time frame gives me a macro view of the currency pair. It provides me a sense of how the major market participants are positioned. I am looking at long term support and resistance levels that may come into play soon. Also I want to make sure to avoid trading directly into a long term support or resistance zone.

• Daily Chart

The Daily chart is extremely important in my overall decision process. I will not take a trading position without first doing thorough technical analysis on the daily chart. I will typically plot horizontal price support and resistance levels, supply and demand zones, and perform relevant trend line and pattern analysis on the daily.
Even though my setup time frame is the 240 minute chart, I consider the daily time frame to be the most important for my trade analysis. Why? Because this is where the Big Boys play. I want to make sure I am positioned on the side of the big institutional and bank order flows that are capable for moving prices.

• 240 minute chart

I will typically use the 240 minute chart in two ways. For example, if after I have done an evaluation of the daily chart and I have formed a strong bias on a particular currency pair, I will zoom down to the 240 minute. From there, I make an assessment to see if there are potential setups emerging that I could trade in line with my Daily chart analysis.
The second way I utilize the 4 hour chart is by independently analyzing the pairs on this time frame, and scanning for high probability setups. When I find a setup that looks promising, I would then consult the daily time frame to make sure that I am not 1) trading against a major trend on the daily 2) not trading right into a daily S/R zone and 3) not trading against a Divergence formation on the daily. By using this 3 prong filter, I find, that I am able to weed out many of the lower probability trades.

• 60 minute chart

This is my execution time frame. Once I have the go-ahead from my 240 minute and Daily chart, I zoom down to the 60 minute chart in order to get the best trade execution. I’m able to see the emerging price action patterns in greater detail. If I am looking for a breakout I will analyze important price swings that I feel, if broken will begin to propel price. If on the other hand, I am looking to enter on a retracement, I will typically apply Fibonacci analysis and possibly other studies to place my limit order.

Improving Entries and Exits

When I discuss Multi time frame analysis with traders, most seem to be able to grasp the importance of using the next higher timeframe to get a big picture view. But many traders seem to stop there, and forget to zoom down to the next lower timeframe in order to optimize their entries.
As you may know or will soon come to realize, that in forex trading, in order to be consistently profitable, you must take advantage of every edge that is available. By ignoring optimal trade execution methods, you are leaving money on the table. So to realize the best trade execution, you should zoom into the next lower timeframe and execute from there. For me, as a swing trader that is the 60 minute chart. Again how did I arrive at that? Well, the 240 min is my trading timeframe, divide that by 4-6 and the 60 minute become the logical choice.
Now I will say that for my own trading, I take a different approach to trade execution when I am entering trades vs when I am exiting trades. On my entries, I want the best possible trade execution, and I will routinely execute off the 60 minute chart. I almost always use limit orders, because I would rather miss the opportunity of getting in on a trade, than I would in sacrificing my trade entry price.
This is a crucial concept to understand. Most traders, on the other hand, typically take the opposite stance. They will chase a trade until they are filled regardless of how far price has moved away from their anticipated entry point.
Now on my exits, I am not as adamant about executing from the lower timeframe. In fact, most times, I will set my stop loss and target the very moment that I enter a trade. And that could be off either the 240 min or 60 min chart. I much prefer to do all my analysis prior to trade execution, and then letting the market do what it will.
Either price will hit my stop for a small loss or hit my target for a nice profit. I have found that, this type of passive trade management works best for me, and reduces the overall stress and emotion in my trading. Sooner or later, you will realize that the moment that you are in a trade, all your biases will come into play and haunt you during your trade management. It is one of the most difficult aspects of trading, and each trader will have to work on an approach most suited to them.