Multiple Time Frame Analysis is a very important technical study to master for FX trading.
The principle to follow in Multiple Time Frame Analysis is this: the chart in the higher time frame shows the larger picture or trend. It is stronger and will have influence on the lower time frame. It is therefore good practice to have a top down approach to analyze a particular chart.
As an illustration, let’s look at the weekly chart of USDX.
USDX Weekly shows a long tail doji resting on the top of a channel
From the chart above, USDX has a rally which seems to be defined by a price channel. Last week’s candlestick showed a long tailed doji star.
This two observations allow us to put together this picture:
- USDX will continue its uptrend as long as it stays in the channel
- Channel lows are supports, they are good retracement levels to go long
- Channel highs are resistances, they are good profit taking levels
- Doji star shows bulls struggling and the entry of bears
As this doji star was on a weekly chart, we can see that it can be broken down into 5 daily candles.
5 Daily Candlesticks make 1 Weekly Candlestick
To continue our multiple time frame analysis, we recall that it is good practice to have a top-down approach. So lets start by doing the weekly analysis.
Weekly Analysis 15 – 19 February 2010
Last week’s candlestick ended as a long tailed doji star. It means that the weekly charts might predict profit taking although the daily charts could show a reversal pattern. As the doji star was on the top of the price channel, this reinforces the likelihood that the USDX might take a respite from its rally.
Daily Analysis
We cascade down to inspect the daily movement of the USDX in the same week. Candles show big swings and had twice 1 day reversals (see 16-17 Feb and 18-19 Feb), which simply reflect the market’s indecision.
Putting together the two analyses, traders could do the following:
- Because we are at the top of the weekly channel, any signal could be used for profit taking for the bull
- Nimble traders could step in for a quick counter trend short in the lower time frame
- Uncommitted bulls can also use any support in the day chart to buy but the optimum buy zone is the channel low in the weekly picture.
Conclusion
The higher time frame will provide a clear picture of the prevailing trend as well as show strong boundaries. These are the support and resistance and will clearly dictate movement of less committed traders using the lower time frame picture. While currency traders are unlikely to be trading the weekly charts, the concepts and principles covered here are equally applicable to other pairing time frames such as the 1-hour/4-hour or the 15-min/60-min.
When the 1-hour and the 4-hour charts are paired, the 4-hour chart gives the larger and stronger picture. When the 15-min and the 60-min charts are paired, the 60-min chart gives the larger and stronger picture as well.
