Step 3 – Time frame analysis

Time frame analysis

In this post I will be introducing you to time frame analysis.  Analyzing more than one time frame when taking a trade may sound advanced, but don’t worry it’s not too difficult at all.

If you are not aware of what time frames are I will briefly explain.  Below are two charts.  The chart on the left is on the daily time frame whilst the chart on the right is on the monthly time frame.

Every candle stick that is on the daily time frame represents 1 day.  Whilst every candle stick on the monthly time frame represents 1 month.  Simple enough right?

Logically you now know that to wait for a setup with the simple break out strategy on the monthly time frame it is going to take a lot longer than waiting for a setup on the daily time frame.  Let me explain this in more detail with the charts below.

time frame analysis picture 1

The charts above show EURUSD on both the monthly time frame and the weekly time frame.  The area marked with the circle on the monthly time frame is also represented on the weekly time frame.  As you can see there are a lot more candles and therefore more setups on the weekly time frame.

On the monthly time frame we cannot see any setups for either a simple or false breakout style of trade.  Clearly if we want to trade more regularly than once a year we should not be using the monthly time frame to analyse the market.

Once you are familiar with time frame analysis you will realize that there are a lot more opportunities to trade when you move down time frames.  If you are the type of trader who likes to trade regularly you should be using the 4 hr and 1 hr time frames.

Whereas if you are the type of trader who wants to trade more passively the daily and weekly time frames would be more suited to you.  Trading the monthly time frame is not something I would recommend doing as it takes far too long for opportunities to set up.

It is vitally important when trading with any strategy you are aware of the bigger picture in Forex.  Analyzing more than one time frame when using my beginners Forex strategy will give you an edge over traders not are simply unaware of multiple time frame analysis.

time frame analysis picture 2

In the image above I have analysed a potential trade setup.  The chart on the left shows what looks like a good opportunity for a simple breakout sell.  I had identified the area of supply as a potentially weak area that looks tempting to sell.

Everything seemed good and I was ready to take the sell.  But what I had not done was give myself a bigger picture view of what was really going on in the market at this time.  This is where the second chart on the right comes in.

The second chart shows the same area marked with the circle that I was looking to sell on the 4hr time frame.  But now I am able to have a bigger picture view of the market as I am looking at a higher time frame.  After looking at the higher time frame (daily time frame) I was able to see a potentially dangerous area of supply.

This area of supply gave me an essential extra piece of information about my trade.  I now know that buying at this large area of supply would make this a high risk trade.  If I had only analysed the market using the smaller time frame I would have been unable to see the bigger picture of what was really happening in the market.

By checking the higher time frames for areas of supply or demand that contradict our original analysis it will give you the bigger picture view of the market you need to trade successfully.

Many traders see multiple time frame analysis as more advanced.  Whereas I see it as a basic yet essential part of trading that should be at the front of every traders mind when analyzing the market.

Using multiple time frames to analyse the market opens up a whole new set of possibilities for you as a trader.  The 2 most important ones I have identified in this article are as follows.

  1. Lower time frames allows for more trading opportunities.
  2. Checking higher time frames allows us to see the bigger picture.

Once you have recognized these points you will be in a much stronger position than many other traders who are simply unaware how important multiple time frame analysis is in Forex.

 

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