Once a trader has mastered technical analysis, multiple timeframe analysis should be used to apply their techniques.
- Look at more than one timeframe to get a better view of the market and important zones of support/resistance.
- Figure out which type of trader you are and what timeframe you are best suited to trading.
- A rule of thumb is to use timeframes that are four to six times longer and shorter than your preferred timeframe.
- Avoid starting your analysis on lower timeframes and working your way up to larger timeframes. Start with the big picture.
- When high timeframe is ranging, short term timeframes tend to be exhibit sharp trends.
What is Multiple Timeframe Analysis?
Multiple timeframe analysis uses different perspectives of an asset’s price to form a complete picture. Traders should be aware of long-term, medium-term and short-term trends as they can all affect your trade. For instance, if your analysis indicated that BTC-USD was going to rise using the 4-hour timeframe, but you ignored a massive sell signal on the weekly chart, then you would have opened a long position and your position might become a losing trade due to the weekly technicals.
Multiple timeframe analysis will help you identify the market structure and overall situation (using longer timeframes), help you to formalise a strategy (by using medium-term timeframes) and then the actual execution of your trade (using lower timeframes). For example, a trader may look at the daily chart to see the overall state of the market, the 4-hour chart to determine the trend and your strategy and then the 15-minute chart to pinpoint an entry into a position.
As a rule of thumb, you should always look at timeframe four to six times longer and shorter than your preferred timeframe. If you prefer the 4-hour chart, then you should also look at the daily chart and 1-hour chart. Similarly, if you trade the daily chart, you can use 4-hour chart and weekly chart.
On the Interdax platform, you can change the timeframe by using the button on the top left-hand side of the trading chart panel.
Technical analysis is more complete by consulting other timeframes, as there are important support and resistance levels for each timeframe, different trends and perhaps conflicting information given by the same indicator. As a trader, you have to reconcile these different perspectives.
The timeframes you analyse depends a lot on your trading style:
- Scalpers usually trade on 1-minute, 5-minute and 15-minute charts and hold positions for a very short amount of time,
- Day traders trade on 15-minute, 1-hour and 4-hour charts and hold positions for less than a day,
- Swing traders trade on 4-hour charts, 12-hour charts and 1-day charts and hold positions for a few days or a couple of weeks,
- Zen traders trade using 1-day charts, 1-week charts and 1-month charts and hold positions for multiple weeks or months at a time.
A 1-minute or 15-minute chart is of little use to a zen trader while the weekly or monthly charts are of little value to a scalper. You should also figure out which timeframe which is most compatible with your personality. For instance, zen trading requires more patience, larger allowance for stop losses and a lower frequency of active trading. On the other hand, scalping requires fast reactions, smaller breathing room for stop losses and a higher frequency of trading.
If the market is extremely volatile and moving very quickly, lower timeframes (such as 5-minute or 15-minute) will be best to determine entries and exits. However, if a market is moving slowly, then longer timeframes will be more suitable.
Looking at the daily chart below, we see bitcoin was in a downward trend and with the trendline providing resistance during August and September. Around September 21, the Relative Strength Index was in a downward trend and fluctuating around the neutral value of 50. After moving below 50, the price neared the resistance provided by the trendline which would have motivated a short position. The short would have been closed once the RSI entered oversold territory (i.e., below 30).
However, if we were looking at the 2-hour chart (shown below), you might have tried to long bitcoin when the RSI almost dipped into oversold territory. Furthermore, the RSI briefly peaked above 50 (suggesting a long position) on September 22, but the oscillator fell back below 50 soon after. Using the 2-hour timeframe in isolation would have ended up in a losing trade if you went long.
However, if you had checked the daily chart and noticed that the price was pretty much respecting the downward trend line, you would have gone short instead of long when combining the daily and 2-hour charts together.
The above example is very simplistic, but the essence is that you check your preferred indicators on different timeframes to ensure that your trade is justifiable on multiple timeframes. Support and resistance levels are another important indicator used with multiple timeframe analysis, along with trend lines, chart patterns, oscillators and candlestick patterns.