Multi-Timeframe Analysis in Trading

One of the most underrated tools in technical analysis is multi-timeframe analysis. Multi-timeframe analysis is using a combination of two or more timeframes to come to a more informed decision about a trade thesis. The sweet spot for the Trade Brigade methodology is three timeframes of analysis. High timeframe, medium timeframe, small timeframe.

Taking this approach of looking at multiple timeframes simultaneously will prevent traders from being blindsided by obvious trends on higher timeframes that wouldn’t be clear if only looking at a small timeframe chart. The medium timeframe is great for refining zones of interest and where the market may see a reaction that aligns with the higher timeframe trend.

What is Multi-Timeframe Analysis?

Multi-timeframe analysis is monitoring price data across different timeframes simultaneously of the same underlying instrument. Day traders will typically use the daily, hourly, and minute charts. Swing traders might use the weekly, daily, and hourly charts. Each timeframe reveals distinct aspects of the market relevant to your timeframe of execution.

An easy way to determine the timeframes that will be most relevant to you is to start by figuring out how long you generally intend to hold a trade. This is usually most influenced by your personal risk tolerance. Whatever that timeframe is, find a chart that reflects it. If you intend to have a trade typically last 1-2 hours for example, using the hourly chart for your medium timeframe is a great place to start. If you intend to hold trades for 15 minutes, the 15 minute chart would be the starting point for your medium timeframe.

To get the larger high timeframe chart and the small timeframe chart use a multiple of four. If hourly is your medium timeframe chart, it would make sense to use a 4 hour or daily chart on the high side, and a 15 minute chart as the small timeframe. If the 15 minute minute chart is your medium timeframe, an hourly high timeframe and 2 or 5 minute small timeframe would be appropriate.

Why Multi-Timeframe Analysis Matters

Trading is all about making decisions based on *all* of the available information. And because markets are dynamic and can exhibit different behaviors on different timeframes, it’s critical that you have a wide angle view of everything relevant to your trade execution.

1. Enhanced Trend Identification: Different timeframes provide varying perspectives on market trends. Longer timeframes, such as daily or weekly charts, help identify major trends, while shorter timeframes reveal minor trends. By analyzing multiple timeframes, traders can confirm the alignment of trends across different scales, increasing the confidence in any given trade.
2. Improved Entry and Exit Points: Multi-timeframe analysis aids in pinpointing optimal entry and exit points for trades. Traders can use longer timeframes to identify potential support and resistance levels, while shorter timeframes help fine-tune entries and exits. This precision can lead to more profitable trades.
3. Reduced Noise: Shorter timeframes often exhibit more noise and volatility. By referring to longer timeframes, traders can filter out noise and focus on significant price movements, allowing for more accurate and in turn profitable analysis.
4. Risk Management: Multi-timeframe analysis contributes to better risk management as well. Traders can identify key levels, trends, and potential reversals across various timeframes, enabling them to set stop-loss and take-profit levels strategically. You might be willing to hold through a minor trend correction, but not through a major trend correction.
5. Adaptability: Markets evolve over time, switching between trending and balancing conditions. Multi-timeframe analysis equips traders to more quickly identify when a trending market is slowing down to a balance, or when a balancing market is beginning to break its range.

Implementing Multi-Timeframe Analysis

When it comes to implementing a multi-timeframe analysis strategy, its always best to take a top down approach. This means starting on the high timeframe and working your way down to the smaller timeframes.

1. Identify the Trend: Begin on your highest timeframe chart to identify the overarching trend. Is the asset in an uptrend, downtrend, or ranging? You don’t just want to say that it’s in an uptrend or a downtrend, you want to make note of exactly what part of the trend sequence you are in. On a higher high in an uptrend? Pulling back for a higher low? Be specific.
2. Fine-Tune Zones of Interest: Once you’ve established the broader trend, shift to the medium timeframe to identify potential areas of interest. Or as we call them, “levels of interest.” Look for confluence between shorter and longer timeframes. You might hear folks call them levels of “support and resistance,” we just call them levels of interest.
3. Find the Entry: On the smallest timeframe, we would call that your execution timeframe, your job is to look for entries. You look for candle patterns, multiple candle patterns, any indications of technical studies that you are using to actually meet the criteria for hitting the buy or sell button.
4. Practice Patience: Multi-timeframe analysis may take more time than simply glancing at a single chart. However, the insights gained often outweigh the extra effort. Practice patience and thorough analysis to make well-informed decisions.

Conclusion

Mastering multi-timeframe analysis can significantly enhance your decision-making and thus trading performance. By simultaneously analyzing price on three or more timeframes, you’ll gain a more comprehensive view of the market. You’ll be better prepared to find entry and exit points, and effectively manage risk with higher timeframe levels and areas of interest. While multi-timeframe analysis requires dedication and practice, the effort is well rewarded. Whether you’re a brand new trader or an experienced pro, multi-timeframe analysis should be in every trader’s toolkit.