Forex trading for beginners: multiple time frame analysis

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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 market. Image courtesy Marco Desscouleurs: http://www.photoxpress.com/search-stock-photos-photographer/Marco+Desscouleurs/239358 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 chart.

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 success.

In our next installment on forex trading we will run through an example to help traders put theory into practice.

See also :

Forex trading for beginners: basic chart types
Forex trading for beginners: how to determine a trend



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , International , Stocks

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