Multiple Time Frame AnalysisTechnical Analysis
The proper order of chart and technical analysis is absolutely essential. A technical analyst entering a new market should always analysis using Multiple Time Frame Analysis. The long term technical analysis is first, followed by midterm technical analysis, and finally short term technical analysis. The reason for analysis execution in this specific order is simple: if you started with short term data and moved outwards, you would constantly have to revise your pricing data and expectations. Moving towards the short term expands the detail provided by your data instead of forcing you to constantly revise it.
An extremely long term chart consists of monthly periods, which often consist of 10 to 50 years’ worth of data. A long term time frame consists of weekly periods, which typically show 5 to 10 years of data. This shows a better perspective of price action. You should identify long-term patterns, trends, channels, support, and resistance as they occur. Take note of important signals from your indicators. If you skip this stage, you will miss a large amount of essential information, since this level takes priority over all others in terms of technical signals. Take note: You will never use long term charts to enter or exit trades, merely to read the long term essentials.
You should also consider your chart settings. You can use semi-logarithmic scaling for your long term analysis instead of the arithmetic setting. Depending on your charting software, semi-logarithmic setting scales changes in price long term periods more accurately than arithmetic scales. Be aware semi-logarithmic charts displays price chart area indicators, trend lines, and channel lines differently than arithmetic settings. Signals will appear earlier or later depending on trends. Lastly, trend and channel lines drawn on long-term time frames should also appear on mid and short term time frames. If you want to be able to differentiate between chart drawings, use color-coding or visual differentiation such as dashed or dotted lines.
After long term analysis, you begin midterm technical analysis, using one to two years of historical data. These are shown best on weekly or daily charts. You should look for the same information you sought on long-term charts but on a shorter time frame. You will need to repeat the same process on the short term time frame, which consists of a few quarters of the year.
The last time frame you will analyze is the intraday time frame. You will look for all of the same information as previous charts, but will also use this level to time your trade entries and exits. If your trade is a midterm trade with no chance of t-regulation margin call requirements, you can possibly use short term daily charts to time entries. In no case should you ever use weekly or monthly charts for timing trade entries and exits. Note that you do not have to use time period bars for your intraday analysis. You can use data-based bars for these settings. Data-based bars come in tick, volume, or range settings.
Technical Analysis and Timeframes
The timeframe selected for trading has a large impact on the consistency of price action. Shorter time frames are subject to higher amounts of volatility and uncertainty, since it is easier to move price a short distance rather than a large distance. Lower time frames (one hour, 30 minute, 15 minute, or 5 minute) have a higher amount of noise and outright price manipulation as a result.
Since it is harder to move price the daily average true range, price moves more consistently over daily, weekly, or monthly chart timeframes. The trading styles of focus becomes Intermediate and longer term trading. For Intermediate Timeframe Trading Systems, we spot trends on the Weekly timeframe, determine stops using price action/structure on Daily timeframe, and use the 4 Hour time frame for best possible entries. Gains are slower than the short term time frame traders, but analysis is also more stable and predictable.
The result of these combinations is simple: we use lower amounts of margin per position and spread risk across multiple positions. Individual positions impact us less, and a group of trending positions will earn us money over longer periods of time. We can also check charts less often. We no longer have to sit in front of a PC for hours, nervously watching a single trade with all our margin inside it.
In both cases, we only trade setups as they appear. We’re looking for confluences, multiple structure and indicator signals combining to hint at a great entry, and a swing low or swing high to indicate entry in the trend direction.
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