Welcome to my Masterclass.
In this lesson you will learn what the foreign exchange market is all about and how we are able to take advantage of the worlds biggest exchange.
Multiple Time-Frame Analysis involves monitoring the same currency pair (or any asset class) across different time frequencies (or time compressions). It is a magnifying tool in your trading arsenal that allows you to zoom into or out of price-action, by using different time intervals to look at the same chart.
Let's use the crate of beer you've lend from your dad as an example to illustrate its significance, but in this scenario you lend not 1, but 100 crates and your dad allows you to give the crates back within three months.
As a beer drinking person you know that prices of crates of beer are increasing throughout the year, so you don't want to be too late by buying them back since prices will probably have been increased (long term trend). You also know that sometimes crates of beer are on sale for short periods of time. You decide to take notice of the monthly sales leaflet from you local liquor store, that you get physically mailed to possibly get a better deal.
Just as you receive the new leaflet with crates of beer being on sale that week, one of your friends tells you that you can get an even better deal by signing up to the liquor store's newsletter, since they sometimes do flash sales that only last one day to attack new customers. So you decide to sign-up and what do you know.. Indeed you get an email from them saying that crates of beer are going to be priced even better, but for the next day only.
Just as you walk into the store, you bumb into another friend who tells you not to buy 100 crates today, but to wait until they overstock and need to get rid of the excess in stock. There is a special WhatsApp group for this you learn since this happens quite frequently. To get this deal, you have to move fast. The overstock has to move within one hour.
Sounds like a good deal you think and you sign-up for the overstock WhatsApp group. Only a few days later you receive a message that crates of beer have been overstocked and they have to get rid of at least 100 crates of within the hour. The discount is greater than the normal price (of course), greater than the monthly sale price from the leaflet and even greater than the daily super sale price as announced in the email newsletter. You get the very best deal possible and buy back the 100 crates at the best possible price.
Without you knowing anything about the monthly sale leaflet, the newsletter with daily offers or the overstock WhatsApp group with the hourly overstock super sale, you would not have been able to get such a good price while prices of crates of beer are still increasing long term.
This is what multi-time-frame chart analyses does to trading as well. It lets you zoom into price action, allowing you get more information and get in at the best price possible. It can also provide confirmation of a trade bias that cannot be seen on just one time frame.
Multiple time frame analysis follows a top down approach when trading and allows traders to gauge the longer-term trend while spotting ideal entries on a smaller time frame chart. After deciding on the appropriate time frames to analyse, we can then conduct technical analysis using multiple time frames to confirm or reject our trading bias.
When all time frames are combined to evaluate a currency pair, we can easily improve the odds of success for a trade, regardless of the other rules applied for a strategy. Performing the top-down analysis encourages trading with the larger trend. This alone lowers risk as there is a higher probability that price action will eventually continue on the longer trend. Applying this theory, the confidence level in a trade should, amongst other criteria, be measured by how the time frames line up.
The rule of thumb is to use a ratio of 1:4 or 1:6 when switching between time frames. The logic behind this approach is to be able to uncover the smaller, intricate movements in price for well-timed entries into the market. That being said, it is of little use to focus on extremely small time frames because most of the price movement has little bearing on the overall trade and can lead to unnecessary stress when the market seem to be moving quickly. For the strategies we trade we only use the following time frames:
3M - which stands for 3 Months, also known as the Quarterly chart
1M - which stands for 1 Month, also known as the Monthly chart
1W - which stands for 1 Week, also known as the Weekly chart
1D - which stands for 1 Day, also known as the Daily chart
240 - which stands for 240 Minutes, also known as the 4 Hour chart
60 - which stands for 60 Minutes, also known as the 1Hour chart
Time is everything
The mark of a true beginner is the act of sitting on a 1 minute chart and announcing an upcoming market turnaround based on the low test candle that just formed. The truth is that a low test candle on a 1 minute chart has next to no significance in technical analysis. The strongest signals always occur when the set up has formed over a longer period of time and therefore attracted the attention of as many market participants as possible. This applies to price action patterns, candlestick patterns, manually drawn trend lines and mathematical indicators.
Think about it. If a low test candle forms on recent support of a 1 minute chart, how many traders are actually going to see it forming? Very few - and out of those traders, how long do they have to take action on it? A minute or two at best. On the contrary, consider a weekly chart approaching a 5 year high/resistance level and confirming that roof with a high test candle. How many traders see this pattern forming? Just about all of them – and out of these traders, how long do they have to take action? They have weeks to think about it, talk about it, throw the idea around with colleagues and post about the potential set up in newsletters, email blasts and online trading articles. The longer that a set up has to “marinate”, the more powerful and delicious the move will be. For this reason, analysis on our higher timeframes always takes precedence over analysis on our lower timeframes.
The Quarterly is more important than the Monthly
The Monthly is more important than the Weekly
The Weekly is more important than the Daily
The Daily is more important than the 4 hour
The 4 hour is more important than the 1 hour
Therefore we use the higher time frames (3M, 1M, 1W) to identify the direction of the market. We use the the lower time frames (1D, 4H, 1H) for two reasons. First we use it to show us where price is in an accumulation phase (Daily and 4H) and secondly - after a break-out of such a phase - were to enter the market in the direction of the larger trend (on the hourly chart). By doing so we are trading with the overall momentum of the market, after price has pulled back to a great area of value at a level where our risk-to-reward is optimised and we are one if the first to enter the position. Perfect.
Below an example of one currency pair (GBPCHF) displayed simultaneous on 6 different time frames (3M (Quaterly), 1M (Month), 1W (Week), 1D (Daily), 240 (4 Hour), 60 (1 Hour).
As you can see they all seem to follow their own trend. Or do they? Look what happens if we draw in one major support and resistance level and one recent chart pattern. Could you have spotted it from the charts above? Probably not, you would have to be able to zoom in and out. Take a look at the chart below.
Now that we are zoomed out, you can clearly see on the Quarterly and the Monthly that the 1,2000 is level that is highly respected. The level has been rejected three times from 2010 upwards by three low-test candles on the Quarterly (bullish sign). Since it is clearly visible on the Quarterly and on the Monthly, it is a key SR level. The last rejection of this 1,2000 level was in July 2019. On the monthly you can see a very nice low-test reversal candle, rejecting this level (again, which is a bullish sign). Also we have MACD divergence on the Quarterly and Monthly chart - see below (which once more is a bullish sign).
Price has been unable to fall through the 1,2000 level and has printed two lows on the 1,2000 level on the monthly chart, giving us a double bottom (which is a bullish sign). As price is holding support, it is printing lower lows in such a way that we can identify a falling wedge on the higher time frames (which is reversal pattern and a bullish sign in this case).
Let's look at the case of evidence for a long bias on GBPCHF:
Quarterly triple bottom with MACD divergence
Quarterly low test candle on last touch
Monthly recent double bottom with MACD divergence
Monthly low test candle on the last touch
Higher time frame falling wedge
So although we are in a down trend (price on the higher time frames is below the EMA's and the 12 EMA is below the 50 EMA as well - we'll dig into this at a later point), the evidence is piling up that we are about to break out of the falling wedge to the upside and see a reversal in trend. Of course price does not have to follow these clues, but more times than not, it will.
Even before price is likely to break out of the falling wedge pattern. There already was one great trade to be made. A trade that we saw and took October 11th 2019, which we will go over in our strategies lesson.
When we go trough our list of currency pairs, CFDs and Indexes at the end of each trading day to spot possible entries for the next trading day, we go through all 6 time frames when we find a setup that meets our criteria. If you decide to use sign up for the BASIC (free) version of tradingview.com, you would have to manually switch between time frames. If you decide to go for a payed subscription such as the PRO, PRO+ or PREMIUM, you can halve multiple timeframes displayed in separate chats in the same window (just like above with the GBPCHF example). This is favorable but certainly not necessary to start trading any of our strategies.
If you decide to go for the free BASIC version of Tradingview, a time efficient routine would be to label the pairs that caught your eye on the monthly and weekly time frame in Tradingview (which can be easily done). For example, if price formed a price pattern (such as a double bottom) or a good candle shape (such as a low-test candle) on the monthly or weekly chart. By highlighting these pairs blue for instance, it would enable you to easily identify a good setup if the daily chart looks good to go for an entry as well without scroll through each time frame manually on every pair.
Since the Quarterly, Monthly and Weekly change very slowly, you can just go through all the pairs on the daily chart. The pairs that are highlighted in blue get some extra attention as you expect a daily signal to line up with your monthly/weekly bias. If the daily signals an entry, only then you zoom into the 4 hour and the 1 hour chart to pin point the entries as described in our strategies.
You'll find that once you get the hang of going through the charts to spot a possible entry for the day ahead, it will only take you about 15-20 minutes each day. The pairs that might trigger an entry for the next trading day, you put on your watchlist with an alarm attached to them. This is nice feature of Tradingview that we'll go though in our chapter 'trading platform'. It basically means that you can let Tradingview notify you (by email or pop-up) that price has come to a certain level where you are interested in taking the trade. Therefore you don't have to physically be at your screen all day watching price. When you've gone through this cycle a few times you will find that trading on average only takes about max 1 hour per day. How nice is that :)