How to perform Multiple Time-Frame Analysis? Getting Started with Multiple Time-Frame Analysis
Mar-How to perform Multiple Time-Frame Analysis? Getting Started with Multiple Time-Frame Analysis
Multiple time-frame analysis
Let us imagine a juggler, using two identical balls. At some point, the two balls will be at exactly the same height — with one going up, and the other coming down, gravity forces are playing out here. Both are moving under the momentum of exterior forces. The same could even be true of four, six or any number of balls. At any one time several variations of momentum could be in play.
Likewise, in terms of an absolute price, what is the difference between a stock that is rising and a stock that is falling?
If you believe that the true value of that asset is much higher than the current price, then how does the recent history and current momentum of price action affect your decision to buy or sell?
The answer depends upon your personality, the type of trader you are and your psychology towards that market. Is the current glass’ half empty, or half full?
Like 2 balls in the air simultaneously, currently at the same height, the true picture only becomes clear with more information.
So unless you are looking at it in a different way by using more data to assess, if the ball is in the process of ascending or descending, (i.e) In which direction are these balls going? Up, down? You won’t get the right answer.
Likewise, when it comes to Your style of investing — would you buy stock A, or stock B both trading at 100
Before you answer that, here are some rules you should remember before making the decision:
· Nope — you don’t get to see the rest of the chart. It is irrelevant
· There is no right answer — your choice simply reflects your trading style
· Everything is considered to be equal fundamentally, except for the recent momentum
· Both stocks are considered to be fundamentally undervalued at 100
· Neither stock has any tangible reason for the recent price action
With this info, let’s look at the chart now.
Stock A is more expensive than you could have bought it for earlier as it is raising, it could be seen as a rolling wagon to jump aboard.
Stock B is cheaper as it is falling and is now a bargain! This often looks good, but momentum traders see it as a falling knife.
Consider both stocks are currently trading at 100. Would you buy on A and sell on B, or vice versa?
The answer is: we need MORE INFORMATION, we need multiple timeframe analysis.
Most technical analysts, whether they are novices or seasoned pros have come across the concept of multiple timeframe analysis in their career. However, multiple timeframe analysis is often the first level of analysis to be forgotten when a trader pursues an edge over the market.
Multiple timeframe analysis involves monitoring the same instrument across different timeframes. While there is no real limit as to how many timeframes can be monitored or which ones to choose, there are general guidelines that we should follow as a trader.
Using three different timeframes gives a broader view of any market. Using fewer than this can result in a considerable loss of data, while using more typically provides redundant analysis and indecision.
When choosing the three timeframes a simple method can be to follow the rule of four. This means that a shorter term time frame should first be determined. So pick the timeframe you want to trade first. Say you selected 15 minutes timeframe as your entry timeframe or short-term timeframe.
Then a medium-term timeframe should be chosen and it should represent a standard as to how long the average trade is held. It should be at least be four times the shorter timeframe. In this case, if we select 15 minutes as shorter term timeframe, 4 time of it would be hourly chart. So 1H or hourly timeframe should be used for the medium or intermediate time frame.
Through the same calculation, the long-term timeframe should be arrived it. It should at least be four times greater than the medium one, so keeping with the previous example, the 4Hour chart would be the third timeframe.
So it is time to dive into multiple time frame analysis and deciding the 3 timeframes to analyse is the first step. So go ahead and decide on your timeframes.
For more details and examples, checkout: