In our last two articles we referred to different time
periods, which in itself is a type of analysis known as Multiple
Time Frame Analysis. This refers to when a technician analyzes
the same currency pair over several different chart time frames,
providing a more detailed look at how the pair is moving in the
Technicians typically start out by evaluating three time frames
based on the trader's particular trading style. For example
traders geared towards long term horizon styles could look at a
weekly, a daily, and a 4-hour chart. Traders that are looking at
a shorter term, such as getting in and out of the trade on the
same day might look at 4-hour, a 1-hour, and a 15-minute
Although personal experience has taught me to always look at
the daily chart even if I'm trading down on a 5 minute chart, I
cannot express how important it is to know what the long term
trend is before diving into lower time period charts.
Technical traders have a saying: "trends exist within trends".
Have you heard of it? It boils down to something like this.
Looking at a daily chart, the trend may be an uptrend, however,
on a 4-hour chart the trend may be down and looking at the 1 hour
chart it may be flat, and so on within the same pair.
In the above example the prevailing trend is based on the
daily chart, in this case up, but within that uptrend price is
creating new highs and new higher lows, causing ripple effects to
the lower time periods. In the 4 hour chart traders will more
clearly see the retracement occurring and at some point in time,
price will stop retracing and will once again be in alignment
with the daily chart. While at the same time, within the 4 hour
chart time will include a trend on the 1 hour and so on. Once the
1 hour trend begins to align with the 4 hour and the 4 hour
aligns with the daily chart, a much higher probability entry
point will likely present itself.
I know it can be confusing getting the hang of this and
wrapping your head around the theory, but once you run through
the exercise it becomes much clearer.
It boils down to the basic elements. As traders we want to
enter in positions once the smallest time frames have completed a
retracement and price action begins to move in the direction of
the daily chart trend. It's this pivot point or change in
direction that traders use as their entry points. Remember a
retracement is when price moves against the longer term trend
found on the daily chart.
By utilizing several time frames traders are able to gain
greater insight regarding the currency pair price movement within
the trend. Using this strategy in conjunction with other
indicators will give the trader the information to be more
successful in entering positions with the highest probability of
In our next installment on forex trading we will run through
an example to help traders put theory into practice.
Forex trading for beginners: basic chart types
Forex trading for beginners: how to determine a