Before reading this lesson, you should have previously read through:

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Multiple time frame analysis is a powerful tool that enables a trader to increase the probability of winning trades and minimise risk. The concept involves observing different time frames for the same asset, identifying the overall market direction on the higher time frames and then looking for entries on the lower time frames.

You can apply the concept for both trend trading and counter-trend trading techniques.

Multiple time frame analysis

When choosing which time frames to look at, time frames too close together can sometimes be unhelpful, or even counter-productive. It is recommended that times frames should be at least four times apart.

For example, if observing a trend on a 1 hour chart, the thirty 30 chart will not provide anything useful that the 1 hour chart already does. You are likely, however, start to see clear cycles on the 15 minute chart.

So if you use an upper time frame of 1 hour, the lower time frame should be at the maximum, 15 minutes. Likewise, if you use an upper time frame of 30 minutes, the lower time frame should be at the maximum, 5 minutes.

Why it works

By understanding what is happening over a longer period of time, you can make more accurate decisions when looking for trading opportunities on the smaller time frames.

If there is a long-term trend on a higher time frame, then trading in the direction of that trend on the lower time frame is likely to produce a higher probability of winning trades.

In terms of counter-trend trading, take, for example, a support or resistance level that has been identified on a higher time frame, say a daily chart. It is likely that there are many more traders observing those particular key levels. Those traders include large banks and financial institutions that trade billions of dollars and generally use higher times frames.

Multiple time frame analysis works because you can identify the trends and possible reversals on the higher time frame, then find more accurate entry points on lower time frames.

The support or resistance level that has been identified on the daily chart is therefore going to be a powerful turning point for counter-trend traders. Once a support or resistance level has been established on the higher time frame, a lower time frame, say the four hour chart, can then be used to fine tune the entries. The higher time frame has provided a very strong support or resistance level, and the lower time frame has given finely-tuned entries with tighter stops, reducing the risk on each trade.

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Using a lower time frame to enter will reduce the risk

To illustrate this point, we will consider an example of a counter-trend trade.

Let’s say that you are looking at the 1 hour chart and have identified a resistance level where you believe the price will reverse to the downside. In order to enter into a position, you would place a stop loss on the other side of the resistance level in case the trade does not work out.

Lower time frames reduce risk because they allow you to place your stop loss at a shorter distance from your entry.

The candles on the one hour chart, however, present the price movement over each hour and the price will move further in one hour than they will in a lower time frame of fifteen minutes. This means that the candles on the 15 minute time frame will be smaller, because the price does not move as far as it would over the course of one hour.

This allows us to place a stop loss that will be a shorter distance from the entry. In this sense, the amount that you risk will be smaller and so the lower time frame actually allows you to reduce the risk.

Multiple time frame analysis using counter-trend trading

The chart below shows that on a higher time frame you can establish the resistance level, shown as number_1. At a resistance level you may be looking to enter a short trade, which would be after the price bounced off of the resistance level. The short entry is shown in the chart as es2. You would then put the stop loss above the resistance level, shown in the chart as sl3. This has resulted in a stop loss distance of 19.5 pips, shown as number_4. However, you can reduce this risk using a lower time frame to enter.

1 hour time frame short entry

number_1 Resistance level
es2 Short entry point on higher time frame
sl3 Stop loss above resistance level
number_4 Higher risk of 19.5 pips

To reduce the risk you can go to a lower time frames and look at entering the short trade after the price has bounced off of the same resistance level.

Take a look at the chart below. The green line shown as number_1, is the same green line shown in the 1 hour chart above — it is the same resistance level. The candles are much smaller on 15 minute chart, because the price does not move as far in fifteen minutes as it does in one hour. This means that you can enter a short position, shown as es2, with a much lower risk, as you can place your stop loss above the resistance line, shown as sl3. This results in a much smaller risk of 8.9 pips, shown in the chart as number_4 compared to the 19.5 pip risk on the 1 hour chart above.

15 minute time frame short entry

number_1 Resistance level
es2 Enter on lower time frame means lower risk
sl3 Stop loss above resistance level
number_4 Lower risk of 8.9 pips

Therefore, using multiple time frames incorporates the benefits of the reliability from the higher time frame and lower risk on the lower time frame.

Summary

So far, you have learned that ...

  • ... multiple time frame analysis is using more than one time frame 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.
  • ... multiple time frame analysis can be used for counter-trend trading.
  • ... using multiple time frame analysis combines the benefits of reliability of a higher time frame and reduced risk of a lower time frame.
  • ... time frames should be at least four times apart.

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  • Great article, this is exactly what I do in my own trading. You can check it out: http://en.tradimo.com/forum/blogs/The-WeexPix_28246/
  • I´m very pleased that you like it, I know that you are putting this into practice since I´m a big fan of your blog and charts. Continue in doing good job. wink
  • Hi
    have a look chart above of H1,there is nice resistance line got from daily chart.H1chart we enter in the market with 19 pips risk trade that's clear but on M15 chart entry has taken when M15 candlestick formation is completing,did not wait for H1 chart candlestick formation.the flow of trend properly takes place when H1 forms any candle formation.if don't take confirmation to H1 chart then multi time frame analysis leaves a lack.1.Daily chart resistance 2.H1 reversal candle on resistance 3.entry on M15 when 1st lh formed by candles that is true MTFA counter and trend entry.waiting for reply..

    thanks
    frank david
  • Hey David, thanks very much for your input smile Our expert traders will look at it in no time!
  • frank.david:
    Hi
    have a look chart above of H1,there is nice resistance line got from daily chart.H1chart we enter in the market with 19 pips risk trade that's clear but on M15 chart entry has taken when M15 candlestick formation is completing,did not wait for H1 chart candlestick formation.the flow of trend properly takes place when H1 forms any candle formation.if don't take confirmation to H1 chart then multi time frame analysis leaves a lack.1.Daily chart resistance 2.H1 reversal candle on resistance 3.entry on M15 when 1st lh formed by candles that is true MTFA counter and trend entry.waiting for reply..

    thanks
    frank david


    Hi Frank,

    Thank you for your comments.

    I think what you are essentially saying is that if you take a daily chart into account for this period, there is a resistance line that would need to be taken into account. This is a good ting that you are looking at the situations surrounding the examples and of course, every perspective is different.

    One trader may see a trend entry and another may see a counter-trend entry when looking at exactly the same situation.

    In the examples above, we do not take into account the daily chart, we have demonstrated the fact that you can get a lower risk and higher probability entry when taking a direction from a higher time frame and entry on a lower time frame.

    The other point - I think - you are making is that on the 15 minute trade, the trend line break as not completed on the 1 hour chart and so therefore the trade on the 15 minute would be late. This is not the core concept of the example.

    When you looking at the 1 hour time frame, you are looking for a direction. The direction is up. The trend line break entries on each time frame are to demonstrate that you get a better risk factor on the lower time frame than on the higher time frame, not that you have to first wait for the trend line to break on the 1 hour chart and then go down to the lower time frame.

    Of course, that is not to say that you cannot wait for a trendline break on a higher time frame and then look for another one later on on a lower time frame - of course you can do this if you choose - every trade is different.

    But the core teaching of this example is that you can combine the benefit of a higher probability entry of a higher time frame and the benefit of a lower risk entry on a lower time frame.
  • Hi
    Dean Peters-Wright:
    frank.david:
    Hi
    have a look chart above of H1,there is nice resistance line got from daily chart.H1chart we enter in the market with 19 pips risk trade that's clear but on M15 chart entry has taken when M15 candlestick formation is completing,did not wait for H1 chart candlestick formation.the flow of trend properly takes place when H1 forms any candle formation.if don't take confirmation to H1 chart then multi time frame analysis leaves a lack.1.Daily chart resistance 2.H1 reversal candle on resistance 3.entry on M15 when 1st lh formed by candles that is true MTFA counter and trend entry.waiting for reply..

    thanks
    frank david


    Hi Frank,

    Thank you for your comments.

    I think what you are essentially saying is that if you take a daily chart into account for this period, there is a resistance line that would need to be taken into account. This is a good ting that you are looking at the situations surrounding the examples and of course, every perspective is different.

    One trader may see a trend entry and another may see a counter-trend entry when looking at exactly the same situation.

    In the examples above, we do not take into account the daily chart, we have demonstrated the fact that you can get a lower risk and higher probability entry when taking a direction from a higher time frame and entry on a lower time frame.

    The other point - I think - you are making is that on the 15 minute trade, the trend line break as not completed on the 1 hour chart and so therefore the trade on the 15 minute would be late. This is not the core concept of the example.

    When you looking at the 1 hour time frame, you are looking for a direction. The direction is up. The trend line break entries on each time frame are to demonstrate that you get a better risk factor on the lower time frame than on the higher time frame, not that you have to first wait for the trend line to break on the 1 hour chart and then go down to the lower time frame.

    Of course, that is not to say that you cannot wait for a trendline break on a higher time frame and then look for another one later on on a lower time frame - of course you can do this if you choose - every trade is different.

    But the core teaching of this example is that you can combine the benefit of a higher probability entry of a higher time frame and the benefit of a lower risk entry on a lower time frame.

    Hi peters

    I always try to enter turning point in the market (let some pips to go to confirm me flow of market has change) and if there is range then bounce/pull of line is my entry price.well I'm just talking about first two charts of this page.H1 chart Resistance line on the chart candle pattern reversal forms clear,now come to M15 chart,resistance line on the chart and reversal candle pattern forms.there is shown entry base on M15 chart but on H1 candle pattern's reversal candle still not close if not waiting close of H1 candle then how can say H1 has confirmed the turn of market?1) First reversal candle on H1 should be closed then go to M15 chart and take entry on 1st lower high/higher low.

    frank
  • Hi Frank,

    Thank you for your reply. The answer is the choice is yours. Of course you can wait until the candle closes on the one hour chart and then look to the 15 minutes chart to make an entry. Or you can look at the established resistance level on the one hour chart and look to the 15 minutes chart much sooner and have the benefit of the 1 hour resistance level, but with the tighter 15 minute stop loss - without waiting for the 1 hour candle to close.

    Different traders will do differnt things.

    The question may be "why would you not wait for the one hour candle to close?"

    Well, the answer would be because you are not looking to enter on the one hour chart, you are looking to see the resistance level. When you go to the 15 minute chart, you would wait for a fifteen minute candle to close, because that is the candle that you are using the entry for.

    if you do decide to wait of extra confirmation, that is perfectly fine; in fact it is a great thing to do. You always have to weigh up a little extra insurance and you may pay with a few pips.

    But essentially it is completely up to you how you would like to execute the trade.
  • Thank you..Peters-Wright
  • Hello frank,

    Let me welcome you in our community, would like to introduce yourself? smile
  • Hi,

    I'm not sure I understood the lower risk entry concept.
    In the last example the stop loss on the higher time frame is calculated to be equal to 61.5 pips.
    In the lower time frame is 21 pips.
    How do I compute position size? Let us suppose I want to risk 2% of my trading capital as per money management rules. Do I have to use the 61.5 value or the 21 value to compute my position size?
    Because in the latter case it seems to me the risk remains the same.
    Eventually, if target doesn't change, the risk to reward ratio will be higher.

    Thanks,
    ρ(h)o
  • Hello,

    There are mistakes in the charts in "Using multiple time frame analysis for trend trading"!

    1. We take a short position (and not a long position) as we sell because of a breakout of the support line (we see a reversal or a correction on the graph and the article about trend lines said "The trend line break method uses the actual breakout of the line to determine an entry. When the price breaks through a trend line, it is no longer valid as support or resistance and it is likely that the price will continue to reverse direction").
    2. In a long position, the stop loss is below the entry. Here, it is above the entry!
    3. The orange point 3 is labelled as "Stop loss below recent swing low". Where is the swing low here?
    4. The colours of the points 2 & 3 in the charts are different in the legends below the charts.

    It is a very confused chart example...
  • hi brettwilde,

    Thank you for bring this to our attention. I am not sure what happened here as it seems as though the system took the screen chart of an old version of the article and then mixed it with a newer version.

    I have tidied the text to fit the charts. Again thank you for pointing this out and sorry for the inconvenience.
  • Hi,
    "Those traders include large banks and financial institutions that trade billions of dollars and generally use higher times frames."
    Why they don't trade on lower times frames like less than D1?
    Thanks.
  • I know it might sounds awk... but can it be assumed that resistance levels can be about 3 stops in any of the time frames and break through to the up the up side to trade long.
  • Hi Ambitionkrist,
    not sure what you mean... can you describe it in with a bit more detail? You can even post a link to an image if that helps. Regards.
    Peter
  • I can reach this section and I can pass the quiz...
    I have more here..thank

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