Commander in Pips: Today we pass to another very significant and, I might say, interesting topic – multiple time frames analysis.
Pipruit: What is it?
Pipruit: Well, probably I might stick to some single time frame and ignore all the others.
Commander in Pips: Hm, that's a very suspicious decision, son. I suppose you understand already that the market could not move in two different directions simultaneously, right?
Pipruit: Yes.
Commander in Pips: And take a look at two different time-frame charts, say, 1-hour of EUR/USD and 5-min EUR/USD, what do you see?
Pipruit: Well, I see upward trend and move on the hourly chart, but a downside move on the 5-min chart.
Commander in Pips: So, what direction you will open your position? If you will ignore the hourly chart – you have to sell, while if you ignore the 5-min chart you have to enter long. There is one single asset but absolutely contradictory positions…
Pipruit: Right, hm, I do not know…
Commander in Pips: Well, at least we come to very important decision – we can’t ignore different time frames. So, if we can’t ignore, or, say, exclude them, hence we can do only one thing – include them into our analysis or, saying it differently, combine them. This is only at first observation that they look opposite, but in reality they are complementary things. And when you will understand how combine them into one large view – then it will give you a big advantage.
Pipruit: Cool!
Commander in Pips: But initially let’s try to answer on some preliminary questions:
- how to understand what particularly time frame to trade on. And, after that
- how to combine them to get an overall view on the market.
How to choose your own primary time frame
In fact there are no some quantitative rules that we could apply to answer this question. I just want to note here that if you’ve chosen the wrong primary time frame to trade, then your trading will be not so efficient as it could be. For example, what particularly time frame you intend to start with when you will finish our school?
Pipruit: Probably I will start out using a 5-minute chart…
Commander in Pips: Why?
Pipruit: Well, because price moves fast, this creates a lot of possibilities and signals and will give me the opportunity become rich fast.
Commander in Pips: …or loose all of your money faster.
Pipruit: I didn’t think about it from that point of view.
Commander in Pips: Really? Well, know you have time to do this. All right, now let us set the jokes aside. A major rule tells us that as a time frame gets shorter, it is harder to trade it.
Pipruit: And why?
Commander in Pips: Because you have to think faster. If you shift from the weekly chart to the daily – you will have to think 5 times faster. Shifting from daily to 4 hour – 6 times faster, from 4-hour to hourly- 4 times, from hourly to 5-min chart – 12 times faster and so on. Depending on your skills there will be time frames where you will not be able to adequately assess the situation. That’s why newbie traders very often loose a lot of money.
The second reason is as your time frame drops, you will come closer and closer to market makers. So, trading on the 5-min chart and 1-min chart you will collide by head on with each other. Now imagine what the level of your trading skills should be so that your positions will be stronger than the market-maker’s one. Any newbie will be crushed in this churn. The trading technique is different when you trade on intraday charts and daily and higher charts. With intraday trading you have to be much more skilful with market mechanics, while on daily and higher time frames, market mechanics is not so important.
Pipruit: But on a 5-min chart I will react faster to price changes than on an hourly chart. The 5-min chart outstrips hourly one.
Commander in Pips: Heh, and a 3-min chart outstrips 5-min, right?
Pipruit: Of course.
Commander in Pips: This is cracking thought and another error of newbie traders. They think that 5-min chart is better than the hourly and by looking at 5 min they can be ahead of the hourly chart and predict it, but they are wrong - all time frames react simultaneously on the price, since you see price moving on all charts at the same time.
Commander in Pips: First, you should try to trade on different time frames. You will find many traders who trade at absolutely different time frames. As a result you have to find the time frame that is most suitable for your personality. It’s absolutely true that you will be under pressure during trading that will be explained by the fact that you trade with real money. But this pressure should be explained by too fast trading or too slow. If you frustrating, since you have to wait for next trading signal too long and this presses on you – that’s not good. Or when you trade too much and in this rush you can’t think and that pressures you – that is not good also.
You have to find such a time frame where you feel comfortable. First, you peacefully prepare your initial analysis, place orders if it needs to and so on. Then you wait for price action. If the situation has changed – you need time to re-analyze conditions. This also should be in done peace and quiet without any rush and haste. Then again, you look at price action. If this waiting presses you too much, then try a bit lower time frame. Say, drop from 1-hour to 30-min and so on.
If sitting on front of your PC makes you nervous and you think about other things every time – maybe it’s better to trade on the daily basis. You will have to make your analysis just 1-2 times per day. From the other hand if daily trading is too boring and you need more action – shift to intraday time frames etc.
That’s why we strongly recommend Demo trading first.
Ok, as a conclusion I can say followed things that you have to remember:
1. Trading higher time frames is relatively simpler, since they are just slower and you have more time to think;
2. Try many time frames during 1-2 months: daily, 4-hour, hourly, 30-min, and maybe 15-min. I recommend you do not drop lower, at least in the beginning. Personally, I like the hourly time frame.
3. The time frame that you will choose should be active for you but not so fast that you will not fall into a rush. It should force you to be patient but not be so boring that you could fall asleep. You should have some feeling of enjoyment with the trading process – yes, this is hard, this is work, but it should give you some positive feelings.
Also remember about your relatives and friends and other things. Trading is not a whole life – markets will be there tomorrow also. Keep the balance!
Different time frames overview
Commander in Pips: Still, let’s take some look at different time frames in general. Possibly it will help you to make some choices. Trading at each different pace has its own advantages and lacks and this is not so simple just to say – faster trading is always better. This is not the fact at all. So let’s start from Long-term trading:
Long – term trading usually starts from daily time frames and higher – weekly, monthly or even quarterly, but most popular are daily and weekly charts. The average duration of trade could last for some weeks to months or even years sometimes. Applying long-term trading, the trader acts as follows. He or she uses 1 step higher time frame to see the trend and significant support/resistance levels, oversold/overbought analysis and the current time frame to catch some patterns to enter the trade or exit. For instance, if we trade on daily chart, we have to use weekly for trend estimation, significant support/resistance levels, while the daily time frame could be used for searching for particular patterns to enter the trade.
Advantages of long-term trading are:
- You do not need to sit in front of your PC the whole day every day;
- You spend much less time on trading and analysis;
- You do not depend much on market mechanics;
- You have much time to make a decision and think about each trade;
- Your trades are relatively rare, so you save more money on transaction costs, since you buy and sell much more rarely than an intraday trader;
- Although technical analysis could be applied to any time frame trading (with significant liquidity), fundamental analysis becomes very important, even to say dominant in long-term trading.
- IF you trade not Forex but some other asset – you can save money and do not pay for real-time quotes, since you will be fast enough even with delayed quotes for 30-40 minutes.
- You do not depend much from intraday volatility, spikes and fake outs, especially during macro data releases. Only drastic change in fundamental perspectives could hurt your position.
Disadvantages of long-term trading are:
- Since you make trades relatively rarely – you need to have a lot of patience. That is 50% of long-term trading;
- You have to put much more money into your account, since your stops will be much farther than on intraday trading;
- Much time has to pass, before you will understand whether you have entered right or wrong;
- If you will fail – you will fail miserably, since each trade will eat much time and money (if your stop will be triggered) – farther stops, long swings.
Short-term trading usually includes trades that are based on the hourly time frame and higher. That is my preferred time frame. As a context you usually use the daily trend and time frame but also should know weekly and monthly support/resistance levels and overbought/oversold levels, while the trend is not so significant. Usual duration of the trade varies from few hours to a week.
Advantages of short-term trading are:
- Less demand for patience, more active trading and faster results;
- More opportunities for trading;
- Less demand for minimum account value, since swings are shorter and stops are tighter;
- Absence of reliance on just single trade for extended time period to make money;
- Significant amount on time to create a trading plan for a day and plan each trade;
- Less depending on fundamental analysis;
Disadvantages of short-term trading are:
- most of the time you still need to sit in front of PC;
- Higher requirements to get good quotes and market data;
- Choosing a broker becomes a more important task to do;
- Transaction costs becomes higher;
- Knowledge of market mechanics are preferable;
- Spikes, fake outs, macro data releases becomes a real danger;
- Overnight price action becomes an additional risk.
Scalping (very short-term trading) is for those who intend to trade on 1- 5 minutes charts using as a context for trading 15-30 minutes charts. Sometimes this approach also calls as “Intraday” trading, but short-term trading also could be intraday, even if you trade on hourly chart. This is just the question of when you will close your trades. Scalpers (traders who trade in such manner) as a rule close positions by the end of the day.
Advantages of scalping trading are:
- No overnight risk, since you close positions by the end of the day;
- A lot of possibilities. You may make for instance 10 trades per day and that is not the limit;
- Smallest demand for trading account – stops are very tight;
- Possibility to trade with much greater position volume with the same level of risk, since stops are tighter;
- If in general, if you’re profitable trader, you will get fastest results;
- You do not need fundamental analysis.
Disadvantages of scalping trading are:
- You have to think very fast and frequently change your opinion;
- You have to do a lot of preparation work, since you will not have time to do it when the market will break some level;
- A good broker becomes extremely important;
- you have to get superb knowledge of market mechanics;
- You will have to take money from pit traders and market makers. That’s really tough work to do;
- Transaction costs will be much greater
- All your time will be spend on trading;
- Your stress level will be the highest among other types of trading.
But whatever time frame you will choose, it has to be suitable for your personality. That’s the major factor. When you will find yourself comfort and calm in decision making and the trading process, that will be the starting point of further trading journey and use of multiple time frames for market analysis. That’s why we strongly recommend that you to try any trading on demo first. But I have to say that the combination of daily/hourly time frames is suitable for a large percentage of traders. The reason is simple. It’s not so boring to trade – if you see something interesting, you may sit a bit in front of screen and make your trade during 1-2 hours. IF you see nothing – you may place orders using daily time frame as context and hourly time frame for levels estimation. So, this is some kind of compromise between all time trading and small time trading.
In other words, your initial task is – find your preferred time frame. The shorter the time frame you live in, the tougher your work becomes.
Commander in Pips: This is cracking thought and another error of newbie traders. They think that 5-min chart is better than the hourly and by looking at 5 min they can be ahead of the hourly chart and predict it, but they are wrong - all time frames react simultaneously on the price, since you see price moving on all charts at the same time.
Pipruit: So, what we have to do then?
Commander in Pips: First, you should try to trade on different time frames. You will find many traders who trade at absolutely different time frames. As a result you have to find the time frame that is most suitable for your personality. It’s absolutely true that you will be under pressure during trading that will be explained by the fact that you trade with real money. But this pressure should be explained by too fast trading or too slow. If you frustrating, since you have to wait for next trading signal too long and this presses on you – that’s not good. Or when you trade too much and in this rush you can’t think and that pressures you – that is not good also.
You have to find such a time frame where you feel comfortable. First, you peacefully prepare your initial analysis, place orders if it needs to and so on. Then you wait for price action. If the situation has changed – you need time to re-analyze conditions. This also should be in done peace and quiet without any rush and haste. Then again, you look at price action. If this waiting presses you too much, then try a bit lower time frame. Say, drop from 1-hour to 30-min and so on.
If sitting on front of your PC makes you nervous and you think about other things every time – maybe it’s better to trade on the daily basis. You will have to make your analysis just 1-2 times per day. From the other hand if daily trading is too boring and you need more action – shift to intraday time frames etc.
That’s why we strongly recommend Demo trading first.
Ok, as a conclusion I can say followed things that you have to remember:
1. Trading higher time frames is relatively simpler, since they are just slower and you have more time to think;
2. Try many time frames during 1-2 months: daily, 4-hour, hourly, 30-min, and maybe 15-min. I recommend you do not drop lower, at least in the beginning. Personally, I like the hourly time frame.
3. The time frame that you will choose should be active for you but not so fast that you will not fall into a rush. It should force you to be patient but not be so boring that you could fall asleep. You should have some feeling of enjoyment with the trading process – yes, this is hard, this is work, but it should give you some positive feelings.
Also remember about your relatives and friends and other things. Trading is not a whole life – markets will be there tomorrow also. Keep the balance!
Different time frames overview
Commander in Pips: Still, let’s take some look at different time frames in general. Possibly it will help you to make some choices. Trading at each different pace has its own advantages and lacks and this is not so simple just to say – faster trading is always better. This is not the fact at all. So let’s start from Long-term trading:
Long – term trading usually starts from daily time frames and higher – weekly, monthly or even quarterly, but most popular are daily and weekly charts. The average duration of trade could last for some weeks to months or even years sometimes. Applying long-term trading, the trader acts as follows. He or she uses 1 step higher time frame to see the trend and significant support/resistance levels, oversold/overbought analysis and the current time frame to catch some patterns to enter the trade or exit. For instance, if we trade on daily chart, we have to use weekly for trend estimation, significant support/resistance levels, while the daily time frame could be used for searching for particular patterns to enter the trade.
Advantages of long-term trading are:
- You do not need to sit in front of your PC the whole day every day;
- You spend much less time on trading and analysis;
- You do not depend much on market mechanics;
- You have much time to make a decision and think about each trade;
- Your trades are relatively rare, so you save more money on transaction costs, since you buy and sell much more rarely than an intraday trader;
- Although technical analysis could be applied to any time frame trading (with significant liquidity), fundamental analysis becomes very important, even to say dominant in long-term trading.
- IF you trade not Forex but some other asset – you can save money and do not pay for real-time quotes, since you will be fast enough even with delayed quotes for 30-40 minutes.
- You do not depend much from intraday volatility, spikes and fake outs, especially during macro data releases. Only drastic change in fundamental perspectives could hurt your position.
Disadvantages of long-term trading are:
- Since you make trades relatively rarely – you need to have a lot of patience. That is 50% of long-term trading;
- You have to put much more money into your account, since your stops will be much farther than on intraday trading;
- Much time has to pass, before you will understand whether you have entered right or wrong;
- If you will fail – you will fail miserably, since each trade will eat much time and money (if your stop will be triggered) – farther stops, long swings.
Short-term trading usually includes trades that are based on the hourly time frame and higher. That is my preferred time frame. As a context you usually use the daily trend and time frame but also should know weekly and monthly support/resistance levels and overbought/oversold levels, while the trend is not so significant. Usual duration of the trade varies from few hours to a week.
Advantages of short-term trading are:
- Less demand for patience, more active trading and faster results;
- More opportunities for trading;
- Less demand for minimum account value, since swings are shorter and stops are tighter;
- Absence of reliance on just single trade for extended time period to make money;
- Significant amount on time to create a trading plan for a day and plan each trade;
- Less depending on fundamental analysis;
Disadvantages of short-term trading are:
- most of the time you still need to sit in front of PC;
- Higher requirements to get good quotes and market data;
- Choosing a broker becomes a more important task to do;
- Transaction costs becomes higher;
- Knowledge of market mechanics are preferable;
- Spikes, fake outs, macro data releases becomes a real danger;
- Overnight price action becomes an additional risk.
Scalping (very short-term trading) is for those who intend to trade on 1- 5 minutes charts using as a context for trading 15-30 minutes charts. Sometimes this approach also calls as “Intraday” trading, but short-term trading also could be intraday, even if you trade on hourly chart. This is just the question of when you will close your trades. Scalpers (traders who trade in such manner) as a rule close positions by the end of the day.
Advantages of scalping trading are:
- No overnight risk, since you close positions by the end of the day;
- A lot of possibilities. You may make for instance 10 trades per day and that is not the limit;
- Smallest demand for trading account – stops are very tight;
- Possibility to trade with much greater position volume with the same level of risk, since stops are tighter;
- If in general, if you’re profitable trader, you will get fastest results;
- You do not need fundamental analysis.
Disadvantages of scalping trading are:
- You have to think very fast and frequently change your opinion;
- You have to do a lot of preparation work, since you will not have time to do it when the market will break some level;
- A good broker becomes extremely important;
- you have to get superb knowledge of market mechanics;
- You will have to take money from pit traders and market makers. That’s really tough work to do;
- Transaction costs will be much greater
- All your time will be spend on trading;
- Your stress level will be the highest among other types of trading.
But whatever time frame you will choose, it has to be suitable for your personality. That’s the major factor. When you will find yourself comfort and calm in decision making and the trading process, that will be the starting point of further trading journey and use of multiple time frames for market analysis. That’s why we strongly recommend that you to try any trading on demo first. But I have to say that the combination of daily/hourly time frames is suitable for a large percentage of traders. The reason is simple. It’s not so boring to trade – if you see something interesting, you may sit a bit in front of screen and make your trade during 1-2 hours. IF you see nothing – you may place orders using daily time frame as context and hourly time frame for levels estimation. So, this is some kind of compromise between all time trading and small time trading.
In other words, your initial task is – find your preferred time frame. The shorter the time frame you live in, the tougher your work becomes.
i use a system where whe have a 3th value instead of only looking at the Price and the Time we also use the Speed of the market.
as the market does not know what Timeframe u are using u dont know what the correct timeframe is but when adding speed we can determin the correct timeframe at wich the market moves.
we do that on a very unusual way by using SMA and EMA at different speeds based on Fibonacci numbers.
u have to see it to know how it works but it is very effective this way the market tells us at what speed/timeframe the market is moving and when a reversal is going to happen.
it is not a predicting system but when we got a trigger we know if it wil continue the trend or make a nice reversal.
Greets
Gert