When it comes to trading, multiple time frame analysis plays a significant role because through multiple time frames analysis, we can understand trends much better.
Through this article, I am going to explain to you why it is important to do the multiple time frame analysis and how to do it? But, before going deep into this topic, let us understand-
The most important reason to do multiple time frame analysis is it gives you a broader vision. By saying this, I don’t mean that you should see a 1-month chart or a 1-week chart and take an intraday position according to a broader trend. It’s a totally wrong approach because stocks that may be in an uptrend on a weekly time frame can have a down-trend on a daily or hourly time frame, and based on the weekly time frame, you cannot take intraday positions.
A stock can have an uptrend or a downtrend simultaneously, but it depends upon your time frame. On which time frame you are analysing the charts, decides the trend of the stock for that particular time frame.
So, the important thing one should understand here is that multiple-time frames give you confidence when you trade. That is why it is most important.
Amateur traders often ask me, “on which time frame should I trade?”
Here, there is no specific answer to this question. Selection of the time frame depends upon your trading style and your time horizon for holding that particular trade. So, let us discuss one by one-
If you are an intra-day trader, then forget about weekly and monthly time-frames because they are of no use. For intra-day trading, most traders use daily, hourly, 15-minute, and 5-minute timeframes.
Now, I will tell you how you can use multiple time-frames for intraday trading. Whenever you are planning a trade that is obviously before market hours, first, open the daily time frame and see the shape of the daily candle of the previous day. That will give you a brief idea of how the markets have traded on the previous day. For example, if the daily candle is forming a Doji, then it shows that there was indecisiveness in the market. Similarly, if the market has formed bullish engulfing, then it shows bulls are in action. So, the point here is you should note the shape of the candle.
Now, after analysing the daily time frame, come to an hourly time-frame to know the market structure and important levels. Hourly time-frame often gives you the most important support and resistance levels on the charts along with this, it also gives us important information regarding market structure. For example, after analysing the chart on hourly time-frame, you will get to know whether the stock is rallying or it is taking pull-back or it is in a strong uptrend/downtrend, etc.
Once you get to know about every important piece of data, then you can come to lower time-frames to plan your potential entries and exits. That is how you can do the top-down analysis using multiple time-frames.
For swing trading, there are different times frames that we have to use. You can’t take swing trades based on 5-minute or 15-minute time-frames.
For Swing Trading, traders use different time frames such as 30 min time frame, 4 hours time frame, daily time frame, and weekly timeframe. Swing trading depends upon the time horizon of the trade. For example, if you are doing short-term swing trading, then you can watch 4H, 30 min, and daily time frame and if you are doing long term swing trading in other words, if you want to hold your trade for weeks and months then, in that case, you can use weekly timeframes along with other time frames.
The thing about swing trading is you don’t need to get too many things right, just a few things are good enough. That is why swing trading can work out very well most of the time.
Whenever you are taking a trade, there is obviously someone on the other side, spend some time thinking about what combinations they are probably working with and what their thought process could be and for this, we must analyse the charts on different timeframes, it helps to assume that you’re not the smartest person in the room!
In trading, it is very important to analyse the situation quickly and react accordingly. The more quickly you analyse and react to the situation, the more is the probability of winning. When you spot resistance on multiple timeframes, it becomes easy for you to understand how good that resistance is and react accordingly and vice-versa. So, multiple timeframes play a very important role in technical analysis.
When it comes to support and resistance, the longer the time frame, the stronger the support and resistance. For example, 200-EMA on a 15 min time-frame is stronger than 200-EMA on a 5 min time frame. Similarly, 200 EMA on a 30 min time-frame is stronger than a 15-min time frame. So, the longer time-frames provide more strong support and resistance and can be used to trade when they come into play.
I hope through this article, I was able to explain to you why we use multiple timeframes as well as the purpose of using them. Trading is not a get-rich-quick scheme, it is a skill and takes time to develop. Similarly, you can’t master multiple time-frame analysis in one day, you have to keep trying every day to become a master of it. If you are interested in learning more, then you can definitely check out my previous articles on “How to Read the Stock Charts in 3 Easy Steps | Beginner’s Guide to The Stock Market | Module 9″. Also, if you have any queries regarding this topic, please post them in the comment section.
Want to know more about Elite Trader Program?