In our last lesson we learned about support and resistance and how to spot these levels in the market. We should now have a good understanding of how to spot trends in the market, some of the components that make up those trends, and finally how to recognize support and resistance levels. Now lets tie everything together we have learned thus far with the final concept of this series, multi-time frame analysis.
No matter what time frame you end up using when trading the stock, futures or forex market or what time frame a particular trading strategy calls for, it is important always to have a big picture overview of what is happening in the market. Although there are exceptions, in general most traders will tell you that if your trade setup or analysis lines up on multiple time frames, then the odds of being correct are greatly increased.
Lets look at a simple example by looking for a trade to place to take advantage of a trend that we have spotted on a chart. For this example lets say we are looking at a 5 minute chart of the EUR/USD.
5 Minute EUR/USD Chart:
As you can see from the above chart if we were just looking at the EUR/USD 5 minute chart then we would note the downtrend in the market and sticking to the simple strategy of simply following the trend, we would look for opportunities to sell into the downtrend.
As we want to have a better feeling for the general direction of the market however when we place this trade we next take a look at an hourly chart.
1 Hour EUR/USD Chart:
As we can see from this chart we also spot a longer term downtrend on the hourly chart thus giving us more confidence in our potential trade into the downtrend on the 5 minute chart.
Lastly to make sure that we are getting the full picture we pull up a daily chart.
Daily EUR/USD Chart:
When looking at this chart however we see that not only is the EUR/USD in an uptrend on the daily chart, it is in an extended uptrend. As the daily chart does not line up with the 5 minute and the hourly chart we may want to question whether or not to place the suggested downtrend trade in the face of the large uptrend on the longer term chart.
Now that we understand how a trading signal in the stock, futures, or forex market can be considered “stronger” if it lines up on multiple time frames, a more prudent way to search for potential trades may be to start by looking at the longer term time frames, and then look for opportunities on shorter term charts which are in line with what the longer term charts are showing.
The same concept applies when looking at support and resistance. In general the more time frames and the longer the time frame is that a support or resistance level shows up on the more “valid” that level is considered.