A typical day

This is a typical example of what I am doing recently : wait for one of the numerous significant moves of CL during EVERY day and go with the flow.

Multiple Timeframe Analysis of the Spot Forex

Introduction 

Multiple time frame analysis of the spot forex is by far the most thorough method of analyzing a currency pair. It takes time and effort and this goes against what most forex traders want which is something quick and easy. Most forex traders generally look at only one time frame. For those of you who want to truly understand how the forex works its imperative to be thorough when analyzing a currency pair and the overall market prior to entering a trade and risking your money.

Multiple time frame analysis (MTFA) of the spot forex is completely misunderstood and most forex traders are scared to try to learn it. MTFA is also completely underutilized because it takes more work and most forex traders are looking for shortcuts like forex robots or trading off of one time frame.  A handful of forex traders have mastered MTFA and the number of people who utilize it is slowly growing due to the historical lack of success of forex traders and the dangers of trading on only one time frame.

What is Multiple Time Frame Analysis? 

Multiple time frame analysis (MTFA) is the inspection of very basic forex trend indicators and forex charts, starting with the largest trends and time frames, and working backwards down through successively smaller time frames to see how the smaller time frames and trends feed the larger time frames. When the smaller time frames are in agreement with the larger trends you can enter a spot forex trade in the direction of the trend with very good safety. If no trend exists on a particular currency pair the smaller time frames and trends will, at some point, build an uptrend or downtrend. MTFA is completely logical.

The principles of multiple time frame analysis are also fairly simple and if used daily will help you to learn forex trading and have a complete grasp of the forex market. When using multiple time frame analysis the smaller trends are used to enter the larger trends, if a trend is available,  or to observe how the larger trends are built from the smaller time frames. If a larger trend is currently established on a particular currency pair you would enter the trade when the smaller trends and time frames are in agreement with the larger trends, The smaller time frames confirm the continuation of the established trend.

MTFA has been around for nearly 30 years. The MTFA method is applicable to stock and commodities trading, equity options and currency options, and now forex trading. The method is applicable to any currency pair. We are respectful of the strong technical work of Kathy Lien and Brian Shannon outlining MTFA principles and links to their their technical papers are available at the bottom of this article

Mechanics of Multiple Time Frame Analysis

Multiple time frame analysis is conducted as follows. You take a set of simple trend indicators and forex charts and install them on a forex charting platform. Then start with the largest time frame available on the charting platform and “drill down” the charts to the smaller time frames in descending order on one currency pair.

In order to conduct and accomplish a multiple time frame analysis on the spot forex you need the proper forex charting platform and a set of trend analysis tools and indicators to facilitate the process. Some forex charting tools and platforms are very expensive but many are free. This is discussed in detail below.

How many time frames must be examined on each currency pair?? Based on experience about 8-10 time frames is enough but about 10-15 is much better. You can drill down the charts on the top 15-20 traded currency pairs to seek out the best opportunity.

What is the correct number of time frames that must be in agreement to enter a trade?? Based on experience about 3 time frames is enough if you know the direction of the primary trend on the larger time frames.

The first step when conducting a MTFA on a currency pair is to inspect the largest two or three time frames and trends on one currency pair or several pairs you may be interested in trading. See what currency pairs have established larger trends, then see whether the trending pairs are at the beginning, middle or deep into the trend.

Also determine which pairs are not trending on the larger time frames, any currency pair that is not trending is  likely oscillating or ranging up and down between support and resistance. These pairs could be developing a new directional trend at some point or within a few days. 

What to Observe When Drilling Down The Charts

Every time frame has its own structure and is independent of the other time frames. The higher time frames trends and the direction of the major trend always overrule the lower time frames. The prices in the lower time frames tend to respect the energy points (support and resistance points) of the higher time frame structure. The support and resistance areas in the higher time frame can be validated by the action of lower time periods. 

One time frame may appear to be chaotic and have its own structure, then the next time frame appears to be smoother cycles and much easier to trade, in this case you would trade the smooth time frame because this is what defines the market condition right now and is easy to read. New trends in the smaller time frames enable us to enter the trends in the larger time frames if a currency pair is trending. MTFA will also quickly determine if a currency pair is not trending on the larger time frames and then verify if the pair is  oscillating or ranging between support and resistance on the smaller ones. If a currency pair is not trending, oscillating, or somewhat chaotic at some point the pair will start to trend and the trend will always start on the smaller time frames on the left as the pair breaks out of its range.

The “drilling down the charts” process enables us to identify the smaller trends which feed the larger trends. It will always let us know whether or not a larger trend is starting or is already established. If a currency pair is deep into its trend or movement, MTFA still works but the risk/reward profile of a new entry changes because the trend may be nearing the end of this move. But once again MTFA will keep you informed of this. Trading off of one time frame will never give you any of this information.

If a currency pair is in an uptrend on the larger time frames and sells off against the uptrend you can use the smaller time frames to detect this and then subsequently re-enter the larger uptrend. This form of trend trading is one of the safest methods available of trading the forex. The currency pair sells off against the primary trend establishes a relative low and then reverses back up into the trend. This can also be done when a currency pair moves up against a larger downtrend. Multiple time frame analysis facilitates this but looking at one time frame the trader would be totally ignorant of this low risk trading opportunity. 

To summarize MTFA, you navigate to your charting platform and start with largest time frame and "drill down the charts" looking for the trends, oscillations and ranges, choppiness, orderly and smooth movements and chaotic movements and you observe them. You are looking for smooth time frames and trading cycles that are easier to identify visually. If you believe that the market is choppy this should be noted because you will have a higher probability of stop outs on entries into these choppy markets especially if your stops are pretty tight.

Remember smaller time frames feed the larger time frames. The smaller time frames can be observed in a non trending market as larger trends are slowly built day by day.  If the larger time frames are not trending the smaller time frames are most likely ranging or oscillating. If the larger time frames indicate a trend you will know if you are early or late in the trend cycle. MTFA completely strips down a currency pair so you have deep knowledge of its behavior.

Unfortunately.......

Most forex trading platforms and forex charting systems are not properly designed for MTFA and have a fixed number of time frames that you can work with. Most or all forex charting systems are set up with totally arbitrary time frames with no logic path whatsoever and are totally deficient for MTFA.  The reason for this is that the forex industry and the majority of forex traders have not accepted multiple time frame analysis. Therefore the analysis tools that we are provided with reflect this ignorance and these analysis tools are mostly deficient. So for now we are stuck with these forex charting systems so lets review them now and make the best of what the forex industry and software companies have given us.

Here are two forex charting platforms and their associated time frames. The top charting platform with the arrows is expensive and has 7 different time frames. The 7 time frames are interchangeable so you can add additional groups of 7 more preset time frames so that analysis of 14 or 21 time frames is possible quickly. The tool allows for quick navigation through the time frames by simply clicking on the red and green lights but cost is a  limitation on this charting package.

Here is the forex trading software and forex charts platform known as Metatrader. Metatrader  has 9 fixed arbitrary time frames but the time frames are not customizable. This platform is "adequate" for multiple time frame analysis but about 5 or 6 more time frames would be much more than adequate, especially if the time frames were adjustable and not arbitrary. The limitation on this charting package is the number of fixed time frames but cost is not a limitation, it is free via most forex brokers if you open a live or demo forex trading account. Metatrader platforms also include desktop price alarms that are built in, another added plus. The time frames are highlighted in blue.

 

The chart portion of this image is an example of what one chart on one time frame looks like on Metatrader. This example is an M15 time frame or M15 chart, which is 15 minutes per green vertical bar. The red and green lines are a very simple set of trend indicators and the instructions for setting up these trend indicators across all 9 time frames is listed at the bottom of this article with all of the other links. You can use off the shelf trend indicators to conduct multiple time frame analysis. Simple indicators like these exponential moving averages are fine. Just apply them across multiple time frames and this is what they will look like. You will learn to trade the forex and improve your trading substantially with MTFA.

There are other charting platforms available to forex traders and some high end platforms available from forex brokers that have adjustable time frames. These moving averages and simple trend indicators can be set up on these high end platforms provided by some brokers. We applaud the forex industry and some forex brokers in this area as providing access to better charting systems facilitates more forex traders using MTFA which can only benefit all forex traders.

Additional Thoughts on MTFA

Is it possible to make multiple time frame analysis better?? I believe the answer is yes. Incorporating parallel and inverse analysis into the analysis as well as support and resistance to set price alarms for notification of momentum or a possible entry point can all help.

Incorporation of Parallel and Inverse Pairs 

In other words if you would like to conduct an analysis of various trends and time frames on the USD/CHF for example, then you would conduct a MTFA of this pair but you would also need to conduct the same MTFA across the same time frames for at least two more USD pairs at a minimum, like the EUR/USD and GBP/USD. Then you could determine with alot more confidence if there is consistency and agreement between the three pairs, i.e. consistent USD strength or weakness across all three pairs.  Alternatively if there is no consistency with the USD you could also conduct a MTFA of the GBP/CHF and EUR/CHF looking for consistent trends based on CHF strength or weakness.

Then you would know for sure that the USD/CHF is trending, oscillating and ranging, or choppy and you would also know why, then you have done the analysis of the USD/CHF correctly and thoroughly. This exact analysis method can be applied to any currency pair.

Most forex traders will not do this and most forex traders are not thorough. Traders need to see that it is their money at stake so they had better get used to being thorough from now on. The charts are right there start looking at them and take pride in being thorough.

Scalpers may find MTFA to be to their liking because they would be aware and never trade against the larger trends and potentially hang onto trades much longer. One of the biggest reasons people scalp is that they have no idea which direction the trend is on the pair they want to trade. Or they only look at one time frame. Traders scalp the foreign exchange but statistics show that people who hang on longer and ride longer trends make the most pips. All forex traders benefit from MTFA.

Why do traders not use multiple time frame analysis? Mostly because analyzing alot of pairs and time frames takes time and people basically are lazy. They are looking for the next big thing in the forex when the answer is right in front of them. Looking at one forex chart is all they want to do. Most scalpers only look at one time frame and could possibly be trading against a larger trend, or a scalper may be trading at the beginning of a very large move and exit way too early. If you are near the end of a trend you may also enter a trade after a long move and be entering near the end of the trend. This is poor money management under any scenario. Scalpers need MTFA but traders who would like to stay in their trades longer and ride the trend would, by nature require knowledge of MTFA.

MTFA works, it is that simple. Pips can be made and a more thorough analysis of any currency pair is possible and the method is effective, especially when larger time frames and trends are traded for larger pip totals. Money management ratios also improve when you are entering a larger trend. By applying MTFA to multiple forex pairs in the same parallel or inverse group of pairs your odds increase again, this is because you can choose to trade the best and largest trend available in the spot forex and ride the trends longer. The more pairs you analyze, the more potential pips there are, so there is a payoff for your time and effort.

MTFA analysis of the spot forex is here to stay. Traders worldwide are starting to accept and learning to understand the multiple time frame analysis method and abandoning trading on one time frame due to the additional entry risk and past monetary losses. MTFA is a rigorous method or analyzing the forex. But it is not difficult to learn. When combined with parallel and inverse analysis is quite powerful and can lead to high probability trading plans and trade entries. It can be applied to any currency pair using simple, free trend indicators and analysis tools available on the internet from many spot forex brokers. Instructions on how to set up these simple forex trend indicators are at the bottom of this article.

When the Analysis is Finished What Will I Know ?

After a forex trader has completed analyzing the market with MTFA he or she will know if the currency pairs  examined are trending, oscillating or ranging, or have smooth or choppy trading cycles. The trader will also know if the behavior of the pair has adequate pip potential to consider a trade or putting together a trading plan.

If you follow the rigorous rules in this article  for conducting MTFA you will also know which parallel or inverse pairs in the same individual currency groups are also trending,  which increases your odds tremendously of making the correct analysis and subsequent trade plan or entry.

You will not be ignorant of the larger trends if there is one in place. MTFA should have a profound impact on any forex trader who discovers it. Knowing if a pair is trending or not would be an immediate criteria for a trader to trade or not trade and his or her trading results would start to improve just by glancing at the larger trends. The impact would be positive and immediate and you would start to develop criteria for preparing trading plans while learning the behavior of currency pairs.

What Do I Do Now ?

Okay you have sold me. I believe in multiple time frame analysis. I have analyzed currency pairs with MTFA, I have found a currency pair in a nice uptrend, the parallel and inverse pairs all verify the direction, what do I do now?? How do I enter the trend??

You are almost ready to trade. You have identified a pair and it is trending, you need an entry plan. The pair you are interested in general will have a nearby support and resistance point. In this case the pair you have identified is in an uptrend so you can look for the next resistance point. Now just go to your forex charting platform and set a price alarm at the next resistance area to intercept the next move. When the price alarm hits check the smaller time frames to see if they are in agreement with the larger trends, as outlined in your MTFA setup, and if all of the trends are in agreement enter the trade.

As a final step before entry check this visual map of the spot forex called The Forex Heatmap ®
 

The Forex Heatmap® is a visual map of the spot forex to verify all of your trade entries. The step by step guide to using The Forex Heatmap® is included in this article in the links at the bottom of the page. Now you can verify your entry into the trend. In this example above you have a buy signal for the GBP/CHF.

Now you are ready to trade the spot forex, you analyzed the market thoroughly across multiple time frames and multiple pairs. You determined the trend on a pair, you analyzed multiple parallel and inverse pairs to verify the high probability of the move on the pair, you have set a price alarm to intercept the move, and you checked The Forex Heatmap® entry verification system to verify your trade entry. You are a thorough and accurate forex trader and are now in a position to win on every trade while other traders continue to struggle scalping with indicators on one time frame.

The Future of MTFA

As I stated above there are some high quality charting platforms that work well with multiple time frame analysis. There needs to be more improvements in forex charting platforms with more time frames that fully adjustable by the end user so you are not stuck with fixed forex industry time frames like H1, H4, etc. which decrease the value of MTFA and handcuff forex traders somewhat. More and more traders will demand charts like this or take their business to another forex broker.

The acceptance rate of multiple time frame analysis is slowly growing and the dangers and risks of trading from one time frame are slowly being revealed to forex traders who will want better trading tools. Forex traders will go with the brokers who have the best tools and move their money elsewhere.

At this time multiple time frame analysis is visual and must be done manually with a lot of computer keystrokes and it does take some time. As you get better at it the process goes much faster. In the future MTFA could be done differently and a computerized system of MTFA using advanced forex trading software where the analysis is conducted by a computer that models the data and conducts linear and nonlinear regression for each time frame with least squares analysis. The program would "optimize" a set of at least three time frames for each pair with the lowest standard deviation or highest degree of smoothness for each of the three time frames for that particular currency pair. The computer program would then print out the customized time frames for the trader to set up and watch. This is a vision of computer analysis of the spot forex that I believe will at some point be accomplished.

Three Articles on Multiple Time Frame Analysis 

My personal journey through multiple time frame analysis started when I was reading stocks and commodities magazine and came across Kathy Liens article. In order to understand the principles of multiple time frame analysis you can consult her technical article titled “Trading Currencies Using Multiple Time Frame's” by Kathy Lien and Patrick Dyess. 

I was immediately impacted by Ms. Liens work and I knew that the red and green light software, which had only 4 lights at the time and was the charting platform I was using at the time, was a charting package that needed to be improved upon and at that the software was actually a tool for MTFA, and now everyone else knows this. 

Nobody I worked with understood this software and charting platform and I made it my mission to understand it and to try to be the best at applying this platform to multiple time frame analysis. This evolved into the “Big Lights” method of multiple time frame analysis, and I subsequently put together a set of free trend indicators for multiple time frame analysis on my website that were developed with assistance from others. 

Also there is a link to an excellent article on multiple time frame analysis by Mr. Bryan Shannon at the bottom of this article. The Article is titled "Increase Your Odds With Multiple Time Frame Analysis"

These two articles and the MTFA method had so much of an impact on me that I wrote my own original article, as well as this one, on multiple time frame analysis. Then I  included some new information that includes a discussion of parallel and inverse analysis which could clearly enhance the basic MTFA methods.