Forex Mistake #Multiple- Multiple Time Frames, Multiple Problems

Why Multiple Time Frames Could Get You Broke?

Have you ever tried looking just 5 centimeters in front of your shoes when walking down the street? Have you ever tried driving your car while looking just one meter ahead? Nope? Well, don’t do it because you’ll probably have an accident which is the equivalent of going broke in Forex. If you can’t see the big picture, the information you can use is limited and this affects your decision making. To get more info you have to look further down the road and this translates into using multiple time frames in Forex… but it’s not all milk and honey, so keep reading.

 

Why you can go Broke with Multiple Time Frames? Multi-Analysis is Important

Let’s say you’re walking in a park and you are looking down at your feet, without raising your head to see in front of you. Maybe there’s a tree 5 meters further down the road but of course you won’t be able to see it and adjust your direction because you’re too busy watching the ground 5 centimeters in front of you. Now let’s switch to Forex: if you are trading on a 5 minute chart, you may not be aware that on an hourly chart price is approaching a very important resistance and you might end up buying into this resistance. A higher time frame chart gives you additional information about price action, just how watching the road in front of you gives you more information about potential obstacles, not to mention that price action is smoother on a higher time frame chart. Ok but if you are trading on, say a one hour time frame, you will need a bigger Stop Loss while on a 5 minute chart it could be a lot tighter, so why give up trading on the lower time frame? Don’t worry, you don’t have to give it up, you just have to include the higher chart in your analysis. In other words, determine the trend using a higher time frame and then come down to a 5 minute chart to fine tune your entry, thus being able to use a small Stop Loss. For example, if you see an uptrend on an hourly chart, move down to a 5 minute chart and wait for a bearish retracement. Once the trend resumes, you can join it and I can assure you that you will have a smaller Stop Loss compared to the one you would use if you were trading directly from the hourly chart.

 

Ways of Using Multiple Time Frame Analysis

Ok now that you know more about the usefulness of multiple time frames, maybe it’s time to talk a bit about the practical side of things. There are two main ways of using this type of analysis: the first one is to switch between time frames manually. Check the hourly chart (or your higher chart of choice), determine the trend and then go to the 5 or 15 minute chart. Ok, no need to explain further because I guess everyone can locate the button that changes the time frame on their platforms.

The second way is to use multiple time frame indicators (widely known as MTF). These MTF indicators are a real gem because you can look at a 5 minute chart and have an hourly stochastic (or RSI, or Bollinger, etc.) on it. Of course you are not limited to the combination of 5 minutes – 1 hour and you can choose to display a daily RSI on a 1 minute chart. However, I don’t see what good would that do and this takes me to something else I wanted to mention: when trading with MTF indicators, be careful what time frame combination you use. If you display a daily RSI on a 1 minute chart, even if the higher time frame says the trend is Down, on your 1 minute chart, price can move Up quite a lot and the daily trend will still be Down. The bigger the difference between the two timeframes, the less they are dependent (correlated) on one another. But keep in mind that if the timeframes are very similar (say 30 minutes and hourly), the usefulness of the higher chart drops because it will show almost the same info as the lower time frame.

One final thing about MTF indicators: just like any other indicator, an MTF indicator will be locked when the candle corresponding to their time frame is closed. An hourly stochastic will be locked when the hourly candle is closed and by “locked” I mean it cannot ”uncross” or repaint (in fact that behavior is not repainting in the true sense but I am using the term because many people are familiar with it). Assuming you are using an hourly stochastic on a 5 minute chart, you will need 12 candles (12 candles on a 5 minute chart make up one hourly candle) to close before you can be sure the hourly stochastic is “locked”. Makes sense? If it doesn’t, just read the first sentence of the paragraph again.

 

The Bottom Line

Someone said that knowledge is power and I believe information falls in the same category. By using multiple time frame analysis, you have more information and you can understand easier if the strength belongs to the bulls or bears. It’s not something very easy to grasp by a newbie but if you find the whole idea too complicated, just take away one thing from this article: do not trade against the direction of the higher time frame. Raise your head and look at the big picture.

 

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