Multi-time frame analysis is the process of identifying trade setups by looking at several timeframes. In most cases, such analysis can move from a 30-minute chart down to a 1-minute chart. In other situations, it could move from a daily chart down to a 30-minute chart.
In this article, we will look at what multi-time analysis is and why it is one of the best trading tips you could use in trading.
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What is multi-timeframe analysis?
Trading platforms give you multiple settings to choose from. For example, they give you settings for technical indicators, price action analysis tools, harmonic pattern tools, and timeframes.
These timeframes usually ranges between 1 minute to as much as annual. In most cases, you will never find the annual timeframe useful in trading.
The timeframe is an important setting in trading. Let us look at this in form of an example. The first chart below shows a five-minute chart of Apple. This chart shows that the stock has been in a deep sell-off.
Now, turning to the daily chart, we see that the stock has been in an overall bullish trend for a while. Also, we note that the stock is actually approaching a key support level at $145, which was the highest level on January 25. This support is shown in yellow.
In the five-minute chart, it is hard to realize that this level is actually an important support area.
When in doubt, zoom out
A common phrase in the financial market is, when in doubt, zoom out. This simply means that you should look at another chart timeframe when you find it difficult to understand the overall trend in a chart.
Related » The Rule of Three in Multi-Timeframe Analysis
For example, if you specialize on a short-term chart like a five-minute one and you find yourself struggling to find the real direction, just take a minute and zoom out. Try the daily chart or even the weekly chart. By so doing, you will be at a good position to understand whether the asset is rising or falling.
In our experience, We have found it necessary to always check out whether an asset is a buy or not.
Support and resistance levels
A recent trade happened in the US dollar index chart. As you can see below, the DXY index jumped to a key level of $93.45. On the daily chart, we see that this was an important level since it struggled moving above it in April.
Therefore, in most cases, you expect a financial asset to find some resistance when this happens. It is similar to the formation of the handle section of the cup and handle pattern. As such, you are almost certain that the price will bounce back in due time.
Now, while we have already identified a strong resistance using the daily chart, a look at the 45-minute chart shows no such pattern. Therefore, by zooming out, you will be able to identify key levels of support and resistance.
Understand gappers
Another useful reason for zooming out is when there is a gap-up or a gap-down. A gap happens when an asset’s price opens significantly low or higher. By so doing, the price forms a gap that can easily be seen on the shorter-timeframe chart.
In most cases, the highest or lowest points of the gap will not make sense when you look at short timeframes. Therefore, when you zoom out the chart, you will mostly find that these are important levels of in the market. It could be that the highest point was the previous all-time high.
» Related: Pay attention to morning gappers
Longer, medium, shorter timeframes
Different traders use multiple-timeframe analysis differently. That’s because there are several types of traders.
Scalpers
For example, there are scalpers, who make money by buying and selling assets within a short duration, typically less than 5 minutes. In most cases, a multi-timeframe analysis for such a trader will move from an hourly chart, to a 30-minute chart, and down to a 5-minute chart.
Swing traders
On the other hand, there are swing traders who specialize in making money by opening relatively short-term trades that last for a few days. These traders base their trading on charts that range from a 15-minute to a hourly chart. As such, their multi-timeframe analysis will likely start from a daily chart down to the 15-minute chart.
» Related: Day Trading vs Swing Trading
Long term
Finally, there are longer-term traders who make money by holding trades for a long period. In this case, these traders start by identifying trade positions on the monthly chart and then narrow down to a shorter time frame like a four-hour.
That’s because, while they are mostly interested in a longer chart, they also want to see how the asset is doing in the immediate short term.
Benefits of doing a multi-timeframe analysis
There are several advantages of doing a multi-timeframe analysis when trading:
- Longer-term view – First, this type of analysis will provide you with the longer-term view of a chart as we have seen above.
- Technical levels – It will give you technical levels. For example, if you are using the daily chart, you will be able to see whether the price is above or below the 50-day moving average.
- Stop-loss and take-profit levels – Doing a multi-timeframe analysis will show you the key stop-loss and take-profit levels.
- Filter the noise – A multi-timeframe analysis will help you filter the noise in the market.
Final thoughts
Analyzing multiple charts in an asset is an important thing that will help you make better decisions. It will help you have a longer-term view of charts and help you set your trades well.