Multiple time frame analysis is a form of evaluation that traders capitalize on in forex trading. MFTA is classified as a form of technical analysis. It is critical when the trader wants to gauge or track the performance of currencies within a specified time frame. It is a useful trading strategy for breakout traders, event risk traders, day traders and momentum traders. The reason behind this is that MTFA allows traders who commit a few hours of their time to forex trading to keep up to date with the performance of currencies over an extended period.
MTFA is a forex trading strategy utilized to track the performance of a currency pair across two or more compressions/frequencies. In forex trading, many traders postulate different views when it comes to the number of compressions/frequencies that can be tracked at any given time. However, the average number that most traders track is three. This is because:
In coming up with these three compressions/frequencies, it’s advisable that you use the rule of four. The rule of four stipulates that the trader first needs to identify the medium-term time frame. Once you identify the medium period, the next thing to do is to determine the short-term time frame. Lastly, the trader has to find the long-term time frame.
In identifying these time frames, bear in mind that the medium-term time frame should be ‘reasonable’ and in line with the monitoring period you are looking to observe. The short-term time frame ought to be at least one quarter of the medium time frame, while the long-term time frame should be at least four times the medium time frame. In practice, this means if the medium-term time frame is 60 minutes, the short-term time frame becomes 15 minutes and the long-term time frame becomes 240 minutes.
It’s advisable for traders when it comes to MTFA to start monitoring the long-term time frame and then move downwards to the others. This is due to the fact that the long-term time frame gives traders the chance to notice the trend of trades. As you probably know, studying trends is a prerequisite of forex trading strategies. While it’s advisable to start monitoring the long-term time frame, traders should not base their decisions on the long-term time frame.
The medium-term time frame is the most flexible of all. This comes as a result of its ability to swing freely between the short-term time frame and the long-term time frame. The medium time frame comes in handy especially at those times when you are looking to monitor the main economic trends. Trends exposed by the medium-term time frame largely resonate with the current trends one finds at the market. Thus, traders are advised to base their decisions on the trends highlighted by the medium-term time frame.
The short-term time frame comes with a higher volatility rate, as you might expect. This is because the trades outlined by this analysis are taken over a relatively short period and there incorporate all the significant and insignificant price increases and decreases.