Why do traders choose to use multiple time frame analysis and how they have an edge in trading?
Multiple time frame analysis is key in trading low time frame charts. You can be trading 5 minute charts, 15 minute charts, or hourly charts. Each of these benifit from an analysis from a higher time frame.
This is because a trader only looking at a single time frame has his blinders on in all directions. He needs to be looking around to understand the entire view of the market, and what is happening. With multiple time frame analysis, you take the higher time frame key points of resistance, support, highs/lows, market events, and then you apply them to the lower time frame to find better entries and exits.
Key points on multiple time frame analysis:
- Use a time frame that is near to the one you want to enter your trades on, or one that is so high you only mark key market events. Daily Chart entries look at weekly charts. Hourly chart entries look at daily or 4 hour charts. 15 minute chart traders look at hourly charts. Key market events are the high of the year, or the low of the year. You do not need to constantly monitor high time frame levels like these, but you must pay attention as the market approaches these levels.
- Know that the higher time frame is always dominant. The higher time frame analysis will hold a stronger position in the market. Traders on the hourly charts will easily wipe out any traders on the 5 minute and 1 minute charts because they are dealing with much larger swings in the market. Their position sizing is dominant. Their market control is dominant.
- Don’t be fooled by a “perfect setup” in a 5 minute chart that is going against the hourly charts current trend because the stands in the market are made at large, important swing points.
- On low time frames you need to trade aggressively as if the market is not paying any attention to the resistance and support levels that are shown.
Video: Multiple Time Frame Analysis
Comparing the time frames:
- Each subsequent time frame is less influential on the market as a whole.
- The lower time frames become more “choppy” and harder to predict.
- Large moves, in comparison to regular market activity, happen more frequently in lower time frames.
Focus on the 3rd bullet in this list. With multiple time frame analysis, we do not take into consideration the moves that are made in a lower time frame because they often are extremely choppy in market activity. This market chop makes reading the low time frame charts more difficult because they blow through, with ease, levels of resistance and support. This is why we use a higher time frame for our market analysis. They provide a clear view of agreed upon levels of resistance and support.
For trading Forex, these same concepts apply check out Forex multi time frame analysis here.