Typical Technical Analysis Using Multiple Time Frames
Most experts agree that traders need to use multiple time frames to make an informed trade analysis. There are several time frame charts, ranging from 1-minute all the way to monthly time charts. The confusion usually arises among traders as to which time frame to use. This article will introduce the concept of using multiple time frame charts to make trading decisions.
Multiple time frame analysis is a method of technical analysis where currency price action is monitored using several time frame charts. A conventional multiple time frame analysis will involve the use of at least 3 time frames. The three time frames commonly used are selected according to the “rule of four,” which is that a medium-term time frame should first be used (1-hour hour chart), and then two other time frames corresponding to four times the medium time frame, and one-fourth of the medium time frame chart. This gives us the 15-minute chart (for entries) the 4-hour chart for trend determination and the 1-hour chart for the trade setup.
Technical analysis using multiple time frames
The first step is to start with the longer-term time frame, which is the 4-hour chart. This is to determine the trend of the currency pair. The eventual trade SHOULD be in the trend direction of this time frame. Such trades will have a greater degree of success than if it was taken against the direction of the trend seen on the 4-hour chart. The trend as seen on the four-hour chart is less of market noise and more of true fundamentals at play. Monitoring where the market fundamentals have been pointing to in the recent past helps the trader understand what is happening on the 4-hour charts a whole lot better.
The second step is to look at the 1-hour chart. This chart chronicles the moves within the larger trend. This time frame is a marriage between price action on the shorter and longer time frames. The 1-hour chart is where you should get your trades set up, and where you should be monitoring your trades when they are active.
The third step is the trade execution, which is done using the 15-minute chart. Even though there is more market noise here, previous analyses done on the higher term charts as described above will ensure you are only in when the market noise is in your favor.
Take a look at the illustration of what we have just explained from the charts of the EURUSD below for Friday December 2, 2011.
Trend analysis shows that EURUSD is in a confirmed downtrend. A coordinated interest rate cut by several central banks across the major world economies which provided more dollars for governments, business and banks at a cheaper rate was the fundamental triggering factor for the sudden strength in the US Dollar 48 hours earlier.
The 1-hour chart shows a bearish engulfing pattern which occurred at the same time that a Stochastics cross >80 occurred. This also occurred at R1 resistance.
The third step is the trade execution. If you look at the 1-hour chart, you will notice that the bearish movement for the day started at 10AM EST. At the same time, there was a bearish pinbar and another bearish candle, which together formed a bearish harami. Trade should be opened at the next candle, which eventually turned to a bearish one in keeping with the downward trend bias for EURUSD on the day.
This is a great example of how to apply technical analysis using multiple time frame charts in your Forex trades. Practice until this becomes your second nature.