Multi Timeframe Trading (or Multiple Timeframe Trading as it is sometimes called) is a trading technique that every forex trader should be familiar with.
Now, I’m not saying this to change your trading technique or style and push multi-timeframe trading down your throat…no.
I say this so that you can study multi-time frame trading concept and look at its advantages and see if it can be applied to whatever trading system or technique you are using at the moment and see if it can be a good fit (or not).
So you you really need to keep an open mind about this multi time frame trading thing.
Is Multi Time Frame Trading Difficult?
Now, for most beginner forex traders, the concept of multi-timeframe trading may seem difficult.
But I promise you, if you just spend a bit more time reading and understanding the concepts and the multi-timeframe trading techniques and the multi time frame trading methods that I’m going to show you here, you will be graduating from the multi timeframe trading university with a degree very soon.
Ok, lets get started, cowboy!
What Is Multi Time Trame Trading?
What is multi time frame trading? Multi timeframe trading is a trading technique that uses more than one trading timeframe to analyse a trading setup and then take a trade based on that.
Multi Timeframe traders do not use one single timeframe to trade, they use a handful of them to do their technical analysis and then eventually will settle on one trading timeframe to execute an order.
In most cases, the trading timeframe that they settle in to enter a buy or sell order is the timeframe where the buy or sell signal is found from analyzing the different timeframes.
What Is The Purpose Of Multi Timeframe Trading?
For me, there are 2 main reasons why I use multi-timeframe trading:
- to get better trade entries
- to managing a trade
I will explain both of these reasons in a bit more detail below.
How To Use Multi Timeframe Trading To Get Better Trade Entries
The biggest reason for multi-time frame trading is for getting better trade entries.
Which simply means you want to get into a trade at a better price level at a suitable timeframe.
Why is that? Well, let me explain it further with a tale of two traders, Jack and Jill.
A Tale of Two Traders, Jack And Jill
Imagine Trader Jack is watching the daily timeframe and he sees a diagonal price channel forming on USDCHF and now price is heading down to the lower trendline in the channel.
The only timeframe Jack trades is the daily timeframe, nothing else and so he see a bullish pin bar form after touching the lower trendline and he places his buy stop order 2 pips above the high of that daily candlestick:
Next day, as anticipated, price breaks the high of the that bullish pin bar and continues to move up. Ten days later, Jack’s profit target is hit. He risks 120 pips and make twice that in 10 days.
But 10 days prior, Trader Jill was also watching this same trading setup unfold and she took a buy trade on the same trading setup that Jack took…
Her profit target level was that same as that of Trader Jack and it got hit too.
But here’s the thing: she did not enter at the same price as Jack did.
Here’s what Jill did:
- she saw the trading setup happening in the daily timeframe so when price was near the lower channel trendline she switched to the 1 hour and was waiting to see if she could see a price bounce up (bullish reversal candlestick) from that trendline
- and sure enough a pin bar formed…that was her signal to buy.
- Her stop loss was only 25 pips (Trader Jack’s was 120 pips)
- When her profit target was hit, she made more 320 pips (Jack made 240 pips)
Now lets compare the two traders:
- both traders entered the same trading setup at different buy prices.
- both aimed for the same price level but because of their different entry prices, they made different profits.
- Trader Jack’s Risk:Reward was 1:2
- But Trader Jill’s risk:reward was 1:13!!!
And that my friends lies the power of multi timeframe trading.
How To Use Multi Timeframe Trading To Manage A Trade
Another use of multi timeframe trading is that fact that you can use it to manage your trades.
Well, lets look again at trader Jill for example. She entered the buy trade on the 1 hour timeframe.
But remember, this trade she entered was based on the daily timeframe.
Now, Jill decided that she wants to manage he trade using the daily timeframe and not the 1 hour timeframe where she entered the buy trade in.
Jill’s plan of action was to use the watch the daily timeframe lows and whichever candlestick made a lower low, she was going to move her stop loss and place a trailing stop 2 pips below the low of that daily candlestick.
If price moved 2 pips past the low of that candlestick, she would be stopped out in her trade hopefully with some hundreds of pips in profit.
Based on her trailing stop strategy, she only had to move her stop loss only once before price hit her profit target:
Or another way would be to enter a trade based on the larger timeframe, for example the daily and manage your trade by switching to the smaller timeframe, like the 4 hour or the 1 hour timeframes:
3 Simple Steps To Trading Multi Timeframe Trading Setups
The secret to multi timeframe trading is to think outside the box a little bit.
Here’s a 3 step by step process I use when I’m doing my analysis for multi time frame trading:
Step 1: Start Checking The Larger Timeframes
This is the first step when I do multi-timeframe trading.
I use the top down approach and start with the larger time frames first and checking them to see if there’s any potential trading setups forming.
I consider the monthly, weekly and the daily as my larger timeframes and I start from the Monthly timeframe and work my way down to the daily timeframe.
Why is that?
Well because of these two simple reasons:
- the monthly timeframe gives me a better and bigger picture of what is happening. It is like an eagle that is flying high up and can see wide and far. And from there I work my way down to the weekly then to the daily time frames.
- the monthly timeframe can hide trading setups that form in the weekly, daily, and anything below the daily timeframe.
- Similarly, the weekly timeframe can hide good trading setups that are forming in the daily, 4 hr and the 1 hour timeframes.
That’s why when you do a top down technical analysis, you don’t miss a thing!
Trading setups I’m looking for in the larger timeframe:
- is price near a major support or resistance level?
- is price near a major support turned resistance or resistance turned support level?
- is price near a fibonacci level and does it coincide with other support or resistance levels, trend lines, channels?
- is price forming a channel and where is the price now in relation to the channel trendlines, is it close or not?
- is price heading towards a major trendline?
- Are there any chart patterns forming in the larger timeframes, for example, the head and shoulder pattern?
These are the questions in my head when I’m looking at the charts.
Now here are some things you should know about when doing multi time frame technical analysis:
- larger timeframes can hide trading setups that that form in smaller timeframes.
Step 2: Note The Trading Setups That Will Happen During The Week
This step 2 is important as it allows you to only focus on trading setups that will have the potential to form during the week.
Draw your lines, trendlines, channels, fibonacci retracement levels and wait to see if price will reach them.
Any other trading setups that is way off, don’t bother for now. Only focus on trading setups that will most likely happen within the trading week or trading setups that can happen in 1 to 2 days.
You need to make a note of them and constantly monitor them because sometimes, price can travel fast and reach them and you can miss those amazing trading setups is you are not watching and monitoring them.
Step 3: Trading Time: Switch To A Smaller Timeframe!
Finally the time has come!
Price has reached that trendline (or support level or fib level etc) that you’ve drawn in the monthly timeframe.
What I do is I immediately switch to the 4 hour charts to check out the price action in there and also switch to the 1 hour timeframe.
If it is a sell trade setup, I’m looking for bearish candlesticks as my sell trade entry confirmation.
If it is a bullish trade setup, I’m looking for bullish reversal candlesticks for my buy trade entry confirmation.
Here are important tips:
- sometimes, the 1 hour will not give you reliable reversal candlestick patterns to give you the the confidence to make a trade.
- when such situations happens, I do not trade in the 1 hour but switch to the 4 hour timeframe and wait there to see if I can get a reliable reversal candlestick pattern in that timeframe to buy or sell.
There will be times when I’d be a bit aggressive and switch down the 5 miniture timeframe and trade from there as well If I have too.
Advantages Of Multi Time Frame Trading
- gives you better trade entries
- better trade entries also gives you better or excellent risk:reward ratio which in simple terms means you risk less for the potential to earn more, even 13 times what you risked.
- gives you a better perspective of what can happen, where prices are most likely to reverse etc because of the top down technical analysis approach used and this gets you out of trouble because you know that you should not be looking to sell if price is now near a very major support level or you should not think about buying when price is now near a major resistance level in the monthly timeframe.
- allows you to take trades that have potential to move hundreds to thousands of pips in profits
- suitable for trend and swing traders
Disadvantages of Multi Time Frame Trading
- many new traders may find it difficult initially.
- choosing what smaller timeframe you should stick to for your trade entries
- forget multi timeframe trading is you are a forex scalper at heart! This is not good for you.
So there you have it, the 3 steps on how to do multi-timeframe trading. If you have any questions about multi-timeframe trading, make a comment below. I’d be happy to answer any questions you may have.
Or by the way, I always end my posts with a request for you to share, like, tweet, share these articles and I’m not going to stop on this one. Please share! Thanks