Multiple Time Frame Analysis Thorough, Powerful
Multiple time frame analysis of the spot forex is by far the most thorough method of analyzing a currency pair. It takes effort and this goes against what most traders want which is something quick and easy. Most forex traders generally look at only one time frame. For those of you who want to truly understand how the fx market works it is imperative to be thorough when analyzing a currency pair and the overall market prior to entering a trade and risking your money.
Multiple time frame analysis (MTFA) of the spot forex is completely misunderstood and most traders are scared to try to learn it. MTFA is also completely underutilized because it takes more work and most traders are looking for shortcuts like robots or trading off of one time frame (TF). A handful of currency traders have mastered MTFA and the number of people who utilize it is slowly growing due to the historical lack of success of forex traders and the dangers of trading on only one TF.
What is Multiple Time Frame Analysis?
Multiple time frame analysis (MTFA) is the inspection of very basic trend indicators and charts, starting with the largest trends and time frames, and working backwards down through successively smaller TFs to see how the smaller time frames and trends feed the larger TFs. When the smaller time frames are in agreement with the larger trends you can enter a spot trade in the direction of the trend with very good safety. If no trend exists on a particular currency pair the smaller TFs and trends will, at some point, build an uptrend or downtrend. MTFA is completely logical.
The principles of multiple TF analysis are also fairly simple and if used daily will help you to learn to trade the currency market and have a complete grasp of how it works. When using multiple time frame analysis the smaller trends are used to enter the larger trends, if a trend is available, or to observe how the larger trends are built from the smaller TFs. If a larger trend is currently established on a particular currency pair you would enter the trade when the smaller trends and time frames are in agreement with the larger trends, the smaller TFs confirm the continuation of the established trend.
MTFA has been around for nearly 30 years. The MTFA method is applicable to stock and commodities trading, equity options and currency options, and now foreign exchange trading. The method is applicable to any currency pair. We are respectful of the strong technical work of Kathy Lien and Brian Shannon outlining MTFA principles and links to their technical papers are available at the bottom of this article.
Mechanics of Multiple Time Frame Analysis
Multiple time frame analysis is conducted as follows. You take a set of simple trend indicators and forex charts and install them on a broker charting platform. Then start with the largest TF frame available on the charting platform and “drill down” the charts to the smaller time frames in descending order on one currency pair.
In order to conduct and accomplish a multiple TF analysis on the spot forex you need the proper forex charting platform and a set of trend analysis tools and indicators to facilitate the process. Some forex charting tools and platforms are very expensive but many are free. This is discussed in detail below.
How many time frames must be examined on each currency pair?? Based on experience about 8-10 TFs is enough but about 10-15 is much better. You can drill down the charts on the 28 traded currency pairs to seek out the best opportunity.
What is the correct number of time frames that must be in agreement to enter a trade?? Based on experience about 3 time frames is enough if you know the direction of the primary trend on the larger TFs.
The first step when conducting MTFA on a currency pair is to inspect the largest two or three time frames and trends on one currency pair or several pairs you may be interested in trading. See what currency pairs have established larger trends, then see whether the trending pairs are at the beginning, middle or deep into the trend. There are 9 time frames on Metatrader, see the above image.
Also determine which pairs are not trending on the larger time frames, any currency pair that is not trending is likely oscillating or ranging up and down between support and resistance. These pairs could be developing a new directional trend at some point or within a few days.
Observing The Charts
Every time frame has its own structure and is independent of the other TFs. The higher time frames trends and the direction of the major trend always overrule the lower TFs. The prices in the lower time frames tend to respect the energy points (support and resistance points) of the higher TF structure. The support and resistance areas in the higher time frame can be validated by the action of lower TFs.
One time frame may appear to be chaotic and have its own structure, then the next TF frame appears to be smoother cycles and much easier to trade, in this case you would trade the smooth time frame because this is what defines the market condition right now and is easy to read. New trends in the smaller TFs enable us to enter the trends in the larger time frames if a currency pair is trending. MTFA will also quickly determine if a currency pair is not trending on the larger TFs and then verify if the pair is oscillating or ranging between support and resistance on the smaller ones. If a currency pair is not trending, oscillating, or somewhat chaotic at some point the pair will start to trend and the trend will always start on the smaller time frames on the left as the pair breaks out of its range.
The “drilling down the charts” process enables us to identify the smaller trends which feed the larger trends. It will always let us know whether or not a larger trend is starting or is already established. If a currency pair is deep into its trend or movement, MTFA still works but the risk/reward profile of a new entry changes because the trend may be nearing the end of this move. But once again MTFA will keep you informed of this. Trading off of one TF will never give you any of this information.
If a currency pair is in an uptrend on the larger time frames and sells off against the uptrend you can use the smaller TFs to detect this and then subsequently re-enter the larger uptrend. This form of trend trading is one of the safest methods available of trading the forex. The currency pair sells off against the primary trend establishes a relative low and then reverses back up into the trend. This can also be done when a currency pair moves up against a larger downtrend. Multiple time frame analysis facilitates this, but looking at one TF the trader would be totally ignorant of this low risk trading opportunity.
To summarize MTFA, you navigate to your charting platform and start with the largest time frame and "drill down the charts" looking for the trends, oscillations and ranges, choppiness, orderly and smooth movements and chaotic movements and you observe them. You are looking for smooth time frames and trading cycles that are easier to identify visually. If you believe that the market is choppy this should be noted because you will have a higher probability of stop outs on entries into these choppy markets especially if your stops are pretty tight.
Remember smaller time frames feed the larger TFs. The smaller time frames can be observed in a non-trending market as larger trends are slowly built day by day. If the larger TFs are not trending the smaller time frames are most likely ranging or oscillating. If the larger time frames indicate a trend you will know if you are early or late in the trend cycle. MTFA completely strips down a currency pair so you have deep knowledge of its behavior.
Problems With Charting Systems
Most forex trading platforms and forex charting systems are not properly designed for MTFA and have a fixed number of time frames that you can work with. Most or all forex charting systems are set up with totally arbitrary time frames with no logic path whatsoever and are totally deficient for MTFA. The reason for this is that the forex industry and the majority of forex traders have not accepted multiple time frame analysis. Therefore the analysis tools that we are provided with reflect this ignorance and these analysis tools are mostly deficient. So for now we are stuck with these forex charting systems so lets review them now and make the best of what the forex industry and software companies have given us.
Here is the forex trading software and forex charts platform known as Metatrader. Metatrader has 9 fixed arbitrary time frames but the time frames are not customizable. This platform is "adequate" for multiple time frame analysis but about 5 or 6 more time frames would be much more than adequate, especially if the time frames were adjustable and not arbitrary. The limitation on this charting package is the number of fixed time frames but cost is not a limitation, it is free via most forex brokers if you open a live or demo forex trading account. Metatrader platforms also include desktop price alarms that are built in, another added plus.
The chart portion of this image is an example of what one chart on one time frame looks like on Metatrader. This example is a W1 time frame or W1 chart, which is one day per green vertical bar. The red and green lines are a very simple set of trend indicators. You can use off the shelf trend indicators to conduct multiple time frame analysis. Simple indicators like these exponential moving averages are fine. Just apply them across multiple time frames and this is what they will look like. You will learn to trade the forex and improve your trading substantially with MTFA.
There are other charting platforms available to forex traders and some high end platforms available from forex brokers that have adjustable time frames. These moving averages and simple trend indicators can be set up on these high end platforms provided by some forex brokers. We applaud the forex industry and some forex brokers in this area as providing access to better charting systems facilitates more forex traders using MTFA which can only benefit all forex traders.
Improving Multiple Time Frame Analysis
Is it possible to make multiple time frame analysis better?? I believe the answer is yes. Incorporating parallel and inverse analysis into the analysis as well as support and resistance to set price alarms for notification of momentum or a possible entry point can all help.
Incorporation of Parallel and Inverse Pairs
In other words if you would like to conduct an analysis of various trends and time frames on the USD/CHF for example, then you would conduct MTFA of this pair, but you would also need to conduct the same MTFA across the same time frames for at least two more USD pairs at a minimum, like the EUR/USD and GBP/USD. Then you could determine with a lot more confidence if there is consistency and agreement between the three pairs, i.e. consistent USD strength or weakness across all three pairs. Alternatively if there is no consistency with the USD you could also conduct MTFA of the GBP/CHF and EUR/CHF looking for consistent trends based on CHF strength or weakness.
Then you would know for sure that the USD/CHF is trending, oscillating and ranging, or choppy and you would also know why, then you have done the analysis of the USD/CHF correctly and thoroughly. This exact analysis method can be applied to any currency pair.
Most forex traders will not do this and most forex traders are not thorough. Traders need to see that it is their money at stake so they had better get used to being thorough in their market analysis. The charts are right there so start looking at them differently. We recommend using our forex market analysis spreadsheet to determine what is going on with any currency pair, we use it daily to prepare our trading plans.
Scalpers may find MTFA to be to their liking because they would be aware and never trade against the larger trends and potentially hang onto trades much longer. One of the biggest reasons people scalp is that they have no idea which direction the trend is on the pair they want to trade. Or they only look at one time frame. Traders scalp the foreign exchange but statistics show that people who hang on longer and ride longer trends make the most pips. All forex traders benefit from MTFA.
Why do traders not use multiple time frame analysis? Mostly because analyzing a lot of pairs and time frames takes time and people basically are lazy. They are looking for the next big thing in the forex when the answer is right in front of them. Looking at one forex chart is all they want to do. Most scalpers only look at one time frame and could possibly be trading against a larger trend, or a scalper may be trading at the beginning of a very large move and exit way too early. If you are near the end of a trend you may also enter a trade after a long move and be entering near the end of the trend. This is poor money management under any scenario. Scalpers need MTFA but traders who would like to stay in their trades longer and ride the trend would, by nature require knowledge of MTFA.
MTFA works, it is that simple. Pips can be made and a more thorough analysis of any currency pair is possible and the method is effective, especially when larger time frames and trends are traded for larger pip totals. Money management ratios also improve when you are entering a larger trend. By applying MTFA to multiple forex pairs in the same parallel or inverse group of pairs your odds increase again, this is because you can choose to trade the best and largest trend available in the spot forex and ride the trends longer. The more pairs you analyze, the more potential pips there are, so there is a payoff for your time and effort.
MTFA analysis of the spot forex is here to stay. Traders worldwide are starting to accept and learning to understand the multiple time frame analysis method and abandoning trading on one time frame due to the additional entry risk and past monetary losses. MTFA is a rigorous method for analyzing the forex. But it is not difficult to learn. When combined with parallel and inverse analysis it is quite powerful and can lead to high probability trading plans and trade entries. It can be applied to any currency pair using simple, free trend indicators and analysis tools available on the internet from many spot forex brokers. Instructions on how to set up these simple forex trend indicators are at the bottom of this article.
When the Analysis is Finished What Will I Know?
After a forex trader has completed analyzing the market with MTFA he or she will know if the currency pairs examined are trending pairs, oscillating or ranging forex pairs, or have smooth or choppy trading cycles. The trader will also know if the behavior of the pair has adequate pip potential to consider a trade or putting together a trading plan.
If you follow the rigorous rules in this article for conducting MTFA you will also know which parallel or inverse pairs in the same individual currency groups are also trending, which increases your odds tremendously of making the correct analysis and subsequent trade plan or entry.
You will not be ignorant of the larger trends if there is one in place. MTFA should have a profound impact on any forex trader who discovers it. Knowing if a pair is trending or not would be an immediate criteria for a trader to trade or not trade and his or her trading results would start to improve just by glancing at the larger trends. The impact would be positive and immediate and you would start to develop criteria for preparing trading plans while learning the behavior of currency pairs.
Start Analyzing Pairs
Okay you have sold me. I believe in multiple time frame analysis. I have analyzed currency pairs with MTFA, I have found a currency pair in a nice uptrend, the parallel and inverse pairs all verify the direction, what do I do now?? How do I enter the trend??
You are almost ready to trade. You have identified a pair and it is trending, you need an entry plan. The pair you are interested in general will have a nearby support and resistance point. In this case the pair you have identified is in an uptrend so you can look for the next resistance point. Now just go to your forex charting platform and set a price alarm at the next resistance area to intercept the next move. When the price alarm hits check the smaller time frames to see if they are in agreement with the larger trends, as outlined in your MTFA setup, and if all of the trends are in agreement enter the trade.
As a final step before entry check this visual map of the spot forex called The Forex Heatmap®. The Forex Heatmap® is a visual map of the spot forex to verify all of your trade entries. Now you can verify your entry into the trend. In this example below you have a buy signal for the NZD/CAD.
Now you are ready to trade the spot forex, you analyzed the market thoroughly across multiple time frames and multiple pairs. You determined the trend on a pair, you analyzed multiple parallel and inverse pairs to verify the high probability of the move on the pair, you have set a price alarm to intercept the move, and you checked The Forex Heatmap® signals to verify your forex trade entry. You are a thorough and accurate forex trader and are now in a position to win on every trade while other traders continue to struggle scalping with indicators on one time frame.
The Future of MTFA
As I stated above there are some high quality charting platforms that work well with multiple time frame analysis. There needs to be more improvements in forex charting platforms with more time frames that are fully adjustable by the end user so you are not stuck with fixed forex industry time frames like H1, H4, etc. which decrease the value of MTFA and handcuff forex traders somewhat. More and more traders will demand charts like this or take their business to another forex broker.
The acceptance rate of multiple time frame analysis is slowly growing and the dangers and risks of trading from one time frame are slowly being revealed to forex traders who will want better trading tools. Forex traders will go with the brokers who have the best tools and move their money elsewhere.
At this time multiple time frame analysis is visual and must be done manually with a lot of computer keystrokes and it does take some time. As you get better at it the process goes much faster. In the future MTFA could be done differently and a computerized system of MTFA using advanced forex trading software where the analysis is conducted by a computer that models the data and conducts linear and nonlinear regression for each time frame with least squares analysis. The program would "optimize" a set of at least three time frames for each pair with the lowest standard deviation or highest degree of smoothness for each of the three time frames for that particular currency pair. The computer program would then print out the customized time frames for the trader to set up and watch. This is a vision of computer analysis of the spot forex that I believe will at some point be accomplished.
Articles About Multiple Time Frame Analysis
My personal journey through multiple time frame analysis started when I was reading stocks and commodities magazine and came across Kathy Liens article. In order to understand the principles of multiple time frame analysis you can consult her technical article titled “Trading Currencies Using Multiple Time Frame's” by Kathy Lien and Patrick Dyess. I was immediately impacted by Ms. Liens work and I knew that this was the best approach to currency pair analysis, now many people know this. I subsequently put together a set of free trend indicators for multiple time frame analysis on my website that were developed with assistance from others.
Also there is a link to an excellent article on multiple time frame analysis by Mr. Bryan Shannon. The Article is titled "Increase Your Odds With Multiple Time Frame Analysis"
These two articles and the MTFA method had so much of an impact on me that I wrote my own original article about MTFA, as well as this one, on multiple time frame analysis. Then I included some new information that includes a discussion of parallel and inverse analysis which could clearly enhance the basic MTFA methods.