Risk Disclosure

"Forex trading can involve the risk of loss beyond your initial deposit. It is not suitable for all investors and you should make sure you understand the risks involved; seeking independent advice if necessary"

Binary Options

Tuesday, April 8, 2008

Multiple Time Frames

Up to now I have looked mainly at single time frames and trends based on that time frame. Many traders look at multiple time frame charts, sometimes with different indicators on each time frame which can lead to confusion.

The question is, what is the best time frame to trade?
Is there an advantage to choosing one time frame over another? Whilst opinions may differ, my feeling is there is a suitable time frame for each individual, based on the amount of capital he has available, probably his trading psych, and his time constraints.

A person with a minimal amount of trading capital won't benefit from trading daily or weekly charts or following analysts long term view of the market. There are a few basics that need to be considered when deciding what time frame is suitable for each individual.

Based on available capital, temperament or personality and trading time available we have to choose a trading time frame that best suites us.

That's not to say we must have tunnel vision and rigidly stick to that time frame. Using multiple time frames can add a new dimension to our trading. That does not mean watching 5 different time frames as that would probably just cause confusion.

When we consider the varying circumstances amongst the millions of traders who participate in the markets daily then I can only conclude that the reason there are literally thousands of trading strategies that seem to work for some but not all, is simply because we all have different personalities and temperaments. If it was one size fits all then there would probably only be one strategy available which would be a closely guarded secret that remained the sole preserve of a privileged few.

Time and again we find the perfect setup for our time frame and enter the market only to watch the market reverse before any meaningful profits are banked. We are quick to condemn that particular strategy and start the search for a new one. A review of the trade later shows that the larger time frame was actually heading in the opposite direction.

Had we done our analysis on the larger time frame and entered on a smaller time frame we would have a higher probability of success than just focusing on one time frame. The question then is what time frames to combine and how many? Mostly I use three time frames, daily for my long term trend, hourly for analysis and 15 min to enter the trades.

Provided there is sufficient difference for the indicators on the smaller time frame to oscillate back and forth without without every little move reflecting on the larger time frame, they can serve our purpose. Many analysts suggest the larger time frame must be four times larger than the smaller time frame. So some suggestions could be.
Multiple Time Frames
1 min5 Min30 Min
5 Min30 Min2 Hrs
15 Min1 Hr4 Hrs
1 Hr4 HrDaily
4 HrsdailyWeekly


On the next 2 charts I have used a standard MACD with a setting of 12, 26, 9 without the histogram. The charting I use does not offer a 2 hr time frame, but we can look at today's trade starting round the European opening confirmed by the MACD cross on 30 min then entering short on a 5 min time frame. Click to enlarge.
As the 30 min chart had already signalled short the 5 min time frame became a higher probability trade in the same direction as the 30 min. We could also stay short until we had a cross of the 30 min to go long, which became our signal to exit the trade with around 200 pips profit. Click to enlarge.


Summary

  • Shorter time frames generally yield smaller profits and require smaller stops therefore less risk.
  • Shorter time frames allow traders with a small capital base to make better use of their margin.
  • Shorter time frames generally mean more trades and more spread paid to your broker.
  • Shorter time frames generally require more time watching the charts for potential trades and probably less time to analyse the market.
  • The larger the time frame, the larger the profit potential and stop loss therefore the larger the risk.
  • Larger time frames generally have larger price swings, causing traders with inadequate capital to risk more than they can afford and probably wipe their accounts out.
  • Larger time frames would mean less trades therefore less spread to pay, more time to analyse the market and would probably suit traders who don't have the time to sit and watch the charts all day.
  • Make it a habit to refer to different time frames
  • Choose a set of time frames to watch and only watch those, familiarise yourself with the market movement within those time frames
  • Don't confuse yourself by trying to watch too many time frames
  • Start your analysis by looking at the big picture.
  • Use the larger time frame to establish the trend, then analyse the shorter time frames for entries and exits.

As we can see there is no right or wrong answer, each trader must find a time frame he is comfortable trading, that won't cause unnecessary stress due to risking more than he can afford. There are pro's and cons for shorter and longer time frames.

Adding a new dimension of multiple time frames by strategising your plan on the higher time frame and implementing the trade on the lower time frame gives you an advantage over traders focusing on a single time frame. Multiple time frames should work with most indicators and offer a host of time frame choices for traders.

1 comment:

Rookie said...

hi very informative blogs i am researching on my own trading on multiple time frame. I use B.band, Stochastic, and MACD on all the time frame i think the analysis can be highly accurate.

By the way i am looking for a link exchange with my blog at Forex Beginner Blog>. If you are interested add me to your blog and drop a comment on my blog to add you and i will do the same. Thanks