Multi-Time Frame Trading analysis is one of the most important things one should be doing before taking any trade. This analysis is one of the simple tools of technical analysis that will help you in reducing loss from your trades.
In order to make you remember this let us start this blog by telling you a true story:
If you live in an area where there is bad weather for some days in a row then you will be able to understand the importance of knowing what the weather is going to be like if you plan an outdoor activity like any sports event, picnic, etc
One day I was planning an outdoor activity that required no rain, snow, winds thunderstorms etc.
It required a beautiful sunny weather at around 4 p.m.
So at 8 a.m. it was a beautiful sunny day with birds chirping and all.
But 4 p.m. was still 8 hours away.
So when I zoom out of the weather radar to see if the weather would be the same at 4 p.m also then guess what I found:
Thunderstorms were heading quickly and this horrible weather was going to take place around that area.
Now let us relate this example with trading. If we had not zoomed out at a larger frame then we won’t be able to notice the changes which could have taken place.
The above scenario can be compared to Multi-Time Frame Trading analysis. We should do this as traders on our charts every time we trade.
What time frames you should be tracking?
General rule is that longer the time frame the more reliable signals are. As we reduce the time frames, the charts may give false signals. Ideally, traders should use long time frame to define the trend of the stocks they are trading.
Once the trend is defined then the traders can use any time frame which they prefer to identify the intermediate trend and a faster time frame to identify the short term trend.
Some examples of putting different time frames into use are:
- Swing trader who focuses on daily charts can use weekly charts to identify the primary trend and 60 minutes charts for identifying the short term trend.
- Day trader can use 60 minutes chart to identify the primary trend and five minute chart to identify the short term trend.
- Positional Trader can focus on weekly charts, use monthly charts to identify the primarily trend and daily charts to identify the entries and exits.
The selection of which timeframe to use depends upon each trader.
A trader should choose the main time frame which they are interested in and then choose a time frame above or below to compliment the time frame.
Do not get caught in taking trades in just one time frame.
We can see from the daily chart of Hindustan Zinc Ltd. below that the stock is in strong uptrend. There is no such strong resistance to stop the continuation of the ongoing uptrend.
Since the daily chart is the preferred time frame for identifying swing trades, the weekly chart need to be analysed to determine if there is any resistance that the ongoing uptrend may face.
Now, from the weekly chart of Hindustan Zinc Ltd, we can see that how 100 Moving Average– an essential technical tool for traders to buy stocks is causing resistance to the ongoing uptrend. There may be chances of stock bouncing back from the resistance.
So from the weekly point of view, you can exit the trade and re-enter the trade when the stock breakouts from the resistance.
We can relate this trading example with the story that I have told above. At the daily time frame we didn’t see any resistance that might end the uptrend but when we zoomed out and saw larger time frame, we noticed how the stock was facing resistance. Just like we saw that the climate was beautiful currently but 8 hours later there was chance of thunderstorms coming.
Benefits of Multi-Time Frame Trading Analysis:
The following are the benefits of using Multi Time frame analysis for trading:
- The trend may appear differently on the time frame which you are looking than the longer term trend.
- Key levels of support and resistance may be there near your trade, but this cannot be seen on the time frame on which you are trading.
- You may have taken a great trade on a shorter time frame and achieve your target but did not realize that if you have taken a longer time frame then you might have earned more profit.
- You can make precise entry points shorter time frames than longer time frames.
- One should take Multi-Time Frame Trading analysis to identify trading opportunities.
- A higher time frame is used to find the overall market direction and a lower time frame is used to find an entry for the trade
- The multiple time frame analysis can be used for counter-trend trading.
- Using multiple time frame analysis helps in combining the benefits of reliability of a higher time frame and also reduces risk of a lower time frame.