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Multiple Timeframe Analysis

Multiple Timeframe Analysis will help us to be on the right track and multiple returns
if done correctly. In order to consistently make money in the markets, as traders we
need to learn how to identify the underlying trend and trade around it accordingly.
Common clichés include: "trade with the trend" "the trend is your friend" can be read
everywhere.

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.

In terms of an absolute price, what is the difference between a stock or Forex pair 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... generally only available in hindsight
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.

It would be a very simple decision to invest in buying an asset that is falling if one
were sure that it was about to bounce and head back up again to levels higher than our
purchase price. It is tempting to visualize that scenario to justify purchasing an asset
that has fallen considerably already. As supply and demand traders we know that
looking at one single scenario (timeframe) is not enough. Looking at these two balls
rising and falling can't tell us where they are coming from or where they are heading
to, we need more information. What is information that we need? We need more
timeframes.

Basing our decisions on the analysis on a single timeframe is not enough to make a
trading decision, we need more timeframes, we need multiple timeframe analysis. The
more timeframe aligned in the same direction, the better. We will have more
information to base our trade direction than a couple of balls rising and falling.

Your style of investing - would you buy stock A, or stock B both trading at $60?
There are some rules:
1. Nope - you don't get to see the rest of the chart. It is irrelevant
2. There is no right answer - your choice simply reflects your trading style
3. Everything is considered to be equal, except for the recent momentum
4. Both stocks are considered to be fundamentally undervalued at $60
5. Neither stock has any tangible reason for the recent price action
Both stocks are considered to be fundamentally undervalued at $60. Would you buy
on A and sell on B, or vice versa?
• Stock B is more expensive than you could have bought it for, it could be seen
as a rolling wagon to jump aboard.
• Stock A is cheaper now - a bargain! This often looks good, but momentum
traders see is a falling knife.
The answer is: we need MORE INFORMATION, we need multiple timeframe
analysis
What is Multiple Timeframe Analysis (MTF)?

Most technical analysts, whether they are novices or seasoned pros have come across
the concept of multiple timeframe analysis in their educations. However, multiple
timeframe analysis is often the first level of analysis to be forgotten when a trader
pursues an edge over the market.

Trends can be classified as long term, intermediate and short-term. However, markets
exist in several time frames simultaneously. As such, there can be conflicting trends
within and sequences a particular asset depending on the time frames being
considered. It is very common for an asset to be in a long term uptrend while being in
a downtrend in swing and short-term trends.

Typically, novice traders lock in on a lower timeframe sequences, ignoring the more
powerful primary trend. Alternately, traders may be trading the long term trend but
underestimating the importance of refining their entries in an ideal short-term time
frame. Which time frame you should track for the best trading outcomes?

Multiple timeframe analysis involves monitoring the same instrument across

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 medium-term timeframe
should first be determined and it should represent a standard as to how long the
average trade is held. From there a shorter term time frame should be chosen and it
should be at least one-fourth the intermediate timeframe, for example a H4 timeframe
for the short-term time frame and D1 timeframe for the medium or intermediate time
frame. Through the same calculation, the long-term timeframe should be at least four
times greater than the intermediate one so keeping with the previous example, the
Weekly chart would be the third timeframe.

Check out the Sequence and Realignment Lesson to learn more about which
timeframes to choose and in which order they should be analyzed. Below is just an
example for a longer term position top down analysis.
It is imperative to select the correct timeframes when choosing the three
periods. Clearly, a long-term trader who holds positions for months will find little use
for M15, H1 and H4 charts. At the same time an intraday trader who holds positions
for hours and rarely longer than a day would find little advantage in daily, weekly and
monthly combinations. This is not to say that the long-term trader would not benefit
from keeping an eye on the H4 chart or the short-term trader from keeping a daily
chart in the selection but you can see how it’s all relative to what you want to achieve.

Putting it all together

When all three timeframes are combined, you will easily improve the odds of success
for your trades, regardless of the other rules applied. Performing the top down
analysis helps you to trade with the larger trend, what we refer to as the bigger picture.
This alone lowers the risk as there is a higher probability that price action will
eventually continue with the longer term trend. The confidence level in a trade should
be measured by how the timeframes line up (more about this in the Realignment
lesson) in the top down analysis. For example, if the larger trend is in up and the
medium and short-term trends are heading lower, taking shorts is not a good idea, you
should be cautious with your profit targets and stops if you decide to take a trade.
Alternatively, you may decide to wait until a higher timeframe demand area has been
reached before you decide to join the longer term uptrend.

Everything will become clearer as you progress further through the topics.

USDMXN MULTIPLE TIMEFRAME ANALYSIS