Using multiple time frames

Discussion in 'Trading' started by Demarco8, Sep 8, 2006.

  1. Demarco8


    Mark Forrester

    What is multiple time frame analysis? It sounds complicated and difficult, but it simply refers to the same chart with multiple time compressions, (intra-day or daily). When both the intra-day and the daily charts are in harmony, the chances of success can be greatly enhanced.

    The essence of the strategy is easy: use the higher time frame price activity to define the tradable trend as well as potential support and resistance levels.
    Since markets exists on several time frames simultaneously, traders often feel confused when they look at charts in different time frames and they see the markets going in several directions at once. Questions arise, which direction should I trade?

    The market may look like a buy on a one minute chart and a sell on the 15 min chart, and vice versa. The signals in different time frames of the same market often contradict one another. Which of them will you follow? Most traders pick one time frame and close their eyes to others – until a sudden move outside of the trader’s time frame hits them.

    Intra-day charts are great, but participants can get caught up in the move of the moment. Even though intra-day charts can contain random movements, they do have their strengths. Once an underlying trend is identified, intra-day charts can be useful to pick entry and exit points. If the trader wants to assume minimal risk, a smaller time frame can narrow the range so the trader can determine if the risk is worth the reward. Think of it this way, once a trader has determined a bullish trend on a daily chart, he or she would have to assume great risk upon execution knowing the market could whipsaw several times before heading in the direction the trader has speculated on. On the other hand, daily charts can help filter out the random movements and can help identify the stronger under currents that are driving the price. But by using a smaller time frame, a trader may be able to enter in the market at a desired location and be able to enter and exit several times until he or she feels comfortable that the market will go in the direction that the trader assumed.

    The same idea applies if you are trading any commodity on an intra-day basis, in which case, the daily bars will be the basis for the trend as well as the important support and resistance points. That is the foundation of multiple time frame trading. Besides the effectiveness of using a method based on a multiple time frame approach, another advantage is the method need not be complicated. A trader can make his or her method as simple or as complicated as desired.