Trading Multiple Time Frames in FX (2024)

Most technical traders in the foreign exchange market have come across the concept of multiple time frame analysis in their market education. However, this well-founded means of reading charts and developing strategies is often the first level of analysis to be forgotten when a trader pursues an edge over the market.

In specializing as a day trader, momentum trader, breakout trader, or event risk trader, many market participants lose sight of the larger trend, miss clear levels of support and resistance, and overlook high probability entry and stop levels. In this article, we define multiple time frame analysis, how to choose the various periods, and how to put it all together.

What Is Multiple Time-Frame Analysis?

Multiple time-frame analysis involves monitoring the same currency pair across different frequencies or time compressions. While there is no real limit as to how many frequencies can be monitored or which specific ones to choose, there are general guidelines that most practitioners tend to follow.

Using three different periods gives a broad enough reading on the market while using fewer than this can result in a considerable loss of data, and using more typically provides redundant analysis. When choosing the three frequencies, a simple strategy can be to follow a rule of four. This means that:

• A medium-term period should first be determined and it should represent a standard as to how long the average trade is held.
• From there, a shorter-term time frame should be chosen and it should be at least one-fourth of the intermediate period. For example, a 15-minute chart for the short-term time frame and a 60-minute chart for the medium or intermediate time frame.
• The long-term timeframe should be at least four times greater than the intermediate one through the same calculation. So keeping with the previous example, the 240-minuteor four-hourchart would round out the three frequencies.

It's important to select the correct time frame when choosing the range of the three periods. A long-term trader holding positions for months may find little use for a 15-minute, 60-minute, and 240-minute combination. At the same time, a day trader who holds positions for hours and rarely longer than a day would find little advantage in daily, weekly, and monthly arrangements.

This is not to say that the long-term trader would not benefit from keeping an eye on the 240-minute chart or the short-term trader from keeping a daily chart in the repertoire, but these should come at the extremes rather than anchoring the entire range.

Long-Term Time Frame in FX

With the method of studying charts, it is generally the best policy to start with the long-term time frame and work down to the more granular frequencies. By looking at the long-term time frame, the dominant trend is established. It is best to remember the most overused adage in trading for this frequency: The trend is your friend.

Positions should not be executed on this wide-angled chart, but the trades taken should be in the same direction as this frequency's trend is heading. This doesn't mean that trades can't be taken against the larger trend, but that those that are will likely have a lower probability of success and the profit target should be smaller than if it was heading in the direction of the overall trend.

When the long-term time frame has a daily, weekly, or monthly time frame in thecurrency markets, fundamentals tend to have a significant impact on direction. A trader should monitor the major economic trends when following the general trend in this time frame.

Whether the primary economic concern is current account deficits, consumer spending, business investment, or other influences, these developments should be monitored to better understand the direction of price action. At the same time, such dynamics tend to change infrequently, just as the trend in price on this time frame, so they need only be checked occasionally.

Advantages and Disadvantages

Some of the positive aspects of trading in the long term include;

• Lower overall risk because positions are held for longer periods, allowing the trader to ride out the lows until corrections happen.
• Benefiting from market trends, which brings stability to the trader's portfolio and mutes false signals and noise.
• Less time to monitor. Long-term FX traders don't have to react to quick market moves and can hold their positions for longer, which means they can take a step back.
  

The drawbacks of long-term trading in FX are:

• The potential for lower short-term profits. This doesn't mean, however, that the potential for long-term profits decreases.
• Fewer trading opportunities. This is true because traders have to hold their positions for longer periods rather than react to quick movements in the market.
• Increased capital requirements.
  

Medium-Term Time Frame in FX

Increasing the granularity of the same chart to the intermediate time frame, smaller moves within the broader trend become visible. This is the most versatile of the three frequencies because a sense of both the short-term and longer-term time frames can be obtained from this level.

As we said above, the expected holding period for an average trade should define this anchor for the time frame range. This level should be the most frequently followed chart when planning a trade while the trade is on and as the position nears either its profit target or stop loss.

Advantages and Disadvantages

Let's take a look at some of the benefits of trading in the medium term:

• Traders in this timeframe can realize greater profits because of larger price movements.
• This period allows traders to make better decisions about their trades because they have more time to do their research.
• Medium-term traders are generally shielded from false signals and market noise that occur in the markets.
  

Some of the disadvantages of medium-term trading include:

• Medium-term traders are more prone to risk because they hold trades for much longer than short-term traders.
• There may be fewer opportunities available to medium-term traders than those who trade in the short term.
• Traders must resist short-term opportunities and stick to their targets, which means they can't let their emotions get the better of them.

Short-Term Time Frame in FX

Trades should be executed in a short-term time frame. As the smaller fluctuations in price action become clearer, a trader is better able to pick an attractive entry for a position whose direction has already been defined by the higher frequency charts.

Once again, consider that fundamentals hold a heavy influence over price action in these charts, although in a very different way than they do for the higher time frame. Fundamental trends are no longer discernible when charts are below a four-hour frequency.

Instead, the short-term time frame will respond with increased volatility to those indicators dubbed market moving. The more granular this lower time frame is, the bigger the reaction to economic indicators will seem.

These sharp moves often last for a very short time and, as such, are sometimes described as noise. However, a trader will often avoid taking poor trades on these temporary imbalances as they monitor the progression of the other time frames.

Advantages and Disadvantages

Short-term trading in the FX market comes with the following advantages:

• There is a greater potential for higher profits because of small market movements.
• The risk exposure is mitigated because traders hold their positions for shorter times.
• Traders in this time frame can take advantage of many trading opportunities over a single trading day.

The disadvantages of trading FX in the short term include:

• Traders have to make multiple trades, which means more transaction fees and, thus, higher costs.
• Traders have to consistently monitor market activity to identify entry and exit points, making this more time-consuming.
• Traders have to be wary of and wade through all the signals—positive and false—to avoid losses.

Putting It All Together

When all three times are combined to evaluate a currency pair, a trader will 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 be measured by how the time frames line up.

For example, if the larger trend is to the upside but the medium- and short-term trends head lower, cautious shorts should be taken with reasonable profit targets and stops. Alternatively, a trader may wait until a bearish wave runs its course on the lower frequency charts and look to go long at a good level when the three times line up once again.

Another clear benefit from incorporating multiple time frames into analyzing trades is the ability to identify support and resistance readings as well as strong entry and exit levels. A trade's chance of success improves when it is followed on a short-term chart because of the ability of a trader to avoid poor entry prices, ill-placed stops, and/or unreasonable targets.

Example of Multiple Time Frames in FX

To put this theory into action, we will analyze the EUR/USD.

In Figure 1, a monthly frequency was chosen for the long-term time frame. EUR/USD has clearly been in an uptrend for several years. More precisely, the pair has formed a rather consistent rising trendline from a swing low in late 2005. Over a few months, the spot pulled away from this trendline.

Moving down to the medium-term time frame, the general uptrend seen in the monthly chart is still identifiable. However, it is now evident that the spot price has broken a different, yet notable, rising trendline in this period and a correction back to the bigger trend may be underway.

Taking this into consideration, a trade can be fleshed out. For the best chance at profit, a long position should only be considered when the price pulls back to the trendline in the long-term time frame. Another possible trade is to short the break of this medium-term trendline and set the profit target above the monthly chart's technical level.

Depending on what direction we take from the higher period charts, the lower time frame can better frame entry for a short or monitor the decline toward the major trendline. On the four-hour chart shown in Figure 3, a support level of 1.4525 has just recently fallen.

Former support often turns into new resistance (and vice versa) so a short limit entry order can be set just below this technical level and a stop can be placed above 1.4750 to ensure the trade's integrity should spot move up to test the new, short-term falling trend.

The Bottom Line

Using multiple time-frame analysis can drastically improve the odds of making a successful trade. Unfortunately, many traders ignore the usefulness of this technique once they start to find a specialized niche. As we've shown in this article, it may be time for many novice traders to revisit this method because it is a simple way to ensure that a position benefits from the direction of the underlying trend.