What is Multiple Time Frame Analysis
Multiple time frame analysis (MTFA) is a form of evaluation that traders capitalize on in forex trading. MTFA 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.
When and How is Multiple Time Frame Analysis Used
MTFA is 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:
- Anything below three would result in a loss of data, thus leading to skewed results which in turn affect the profitability of the trader
- Anything above three would lead to data which is difficult to comprehend especially for amateur forex traders
Identifying Time Frames
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.
Applying The Long-Term Time Frame
It’s advisable for traders when it comes to multiple time frame analysis 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.
Applying The Medium-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.
Applying The Short-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.
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