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Ever wonder why I reference multiple timeframes in my pre market analysis before entering trades?

Well… just imagine this…

Have you ever looked at a long trade on the 5 minute chart and thought to yourself… 

“Did I really just go long and now I see a short trade on the 1 hour timeframe?”

Then you start looking at the daily timeframe.

Then the monthly, and the weekly, and back to the 15 minute.

And next thing you know you are totally confused!

Now this is where an inexperienced trader starts to doubt their own trade setup on the 5 minute chart and you either don’t trade or exit immediately.

Because you have no idea what is going on!

This comes down to one question…

Should you even be looking at additional timeframes? 

 

What are multiple timeframes

 

Multiple Timeframe Analysis (MTA) is trading terminology that describes a specific technique used by professionals to analyze Multiple Timeframes (MT’s) in order to confirm a pattern they are trading.

MT’s allow you to “zoom-in or zoom-out” to view the bigger picture or smaller picture of the markets movements.   

In other words, this technique was developed to allow traders to get out of the weeds of a smaller time frame in order to understand what is happening around them.

The MT theory suggests that all timeframes are connected to one another and every timeframe should have influences on one another.  

This reference to patterns on higher or lower time frames is aimed to help traders with the confirmation of a trend or lack thereof.  

Basically…

Looking at multiple time frames lets you zoom in and see what the current price action of the market is doing in the last 5 minutes or intraday, or zoom out to get a macro view of the markets over the last week, month or even longer.

Pro Tip:  Don’t combine weekly time frames with 5 minute time frames.  This will not yield any useful information for the pattern you are trying to trade.

So let’s take a look at how this works at the most basic level using candlesticks.  

Here is an example of a 1 bullish 30 minute candle and 1 bearish 30 minute candle, that when combined, make up a bullish 1 hour candle.

Check it out:

 

 

The first candle is a bearish candle, where it closed higher than where it opened and it closed near the high of the 30 minute bar.

The next 30 minutes was a bearish candle, where it closed near the lows of the day and took out the lows from the prior 30 minute candle.

Now you have two 30 minute candles and combined they create a bearish engulfing pattern

If you combine them, you will get the 3rd candle, which resembles a bullish inverted hammer candlestick.

So, this combined candlestick is just an example of how combining time frames work to help show you the “bigger picture.”

Let’s see how this same concept works on charting patterns.

Next…

 

Selecting your timeframe to trade on

 

This is an important thing to consider and many traders new and experienced seem to always overlook!

You need to ask yourself… 

“What is my primary timeframe to trade on and what is your secondary timeframe?”  

“What is the minor pattern and major pattern look for my trade”

I’ve seen new traders say they enter off the 5 minute timeframe and daily time frame as their secondary level.  

To me this doesn’t make much sense.  

Why?

Well…the 5 minute time frame is too much noise for the daily time frame to be your secondary reference.

So instead, my go-to primary and secondary timeframe is the 5 minute and 15 minute chart… or even as far out as the 30 minute chart.

That’s because I want to know that when I enter a short trade, the higher time frame suggests the short trade is valid, and i’m not entering short into a bull market.

 

The Rule of 4 or 6

 

So what is the Rule of 4 or 6 anyway?  Well.. it’s not a law, but more of a general guideline.  

Let me explain…

So let’s say you are entering off of the 1 minute timeframe.

A factor of 4 would be a 4 minute timeframe or a 6 minute timeframe as your secondary time frame.

Which is why traders use the standard 5 minute chart as the secondary timeframe for the 1 minute chart.  

And if you are a 5 minute chart trader, that would mean your timeframes are the 15-30 minute charts.

Why were those chosen?  

Because of the Rule of 4 or 6 as a general rule to choosing your secondary time frame.

Here are some examples you can use…

  • 1 min / 5 min
  • 5 min / 15 min
  • 5 min / 30 min
  • 15 min / 1 hour
  • 1 hour / 1 day

I know they sound trivial or obvious, but it is really not.  There are many traders who fail to pair the correct time frames with each other.  

This is just a rule of thumb and an example of a simple time frame pairing.

Which means… 

If you are using the 1 minute chart to trade the daily chart… you are not balancing your time frames properly!

You need to find a balance of time frames and the right balance is using the rule of 4 to 6.

Next…

 

Putting this together

 

Now that you understand timeframes, let’s take a look at how to combine them into an actionable trading signal on the two charts.

One of the things you want to look at is the signal on the lower time frame correlating with the direction of the higher timeframe.

If the 1 minute chart is a short trade, but the 15 minute chart shows a bullish pattern… maybe it’s not wise to trade that short position.

For example…

Let’s take a look at how this works for a long trade on the 1 and 5 minute chart.

 

 

In this chart, you can see the 1 minute chart is making higher lows throughout the day.

And if you are a trend trader, that is a signal you would typically look for.

So instead of immediately placing your trade it’s best to check out what’s happening on a higher time frame first.

Now let’s take a look at the 5 minute chart for confirmation next.

 

 

On the 5 minute chart, you can see that a consolidation pattern is forming and a breakout is soon to come.

If you were trading the 5 minute pattern alone, you would just know a breakout is about to occur… but you would not have any insight to what direction it is likely to be.

By using MT’s you can do a top down approach and identify a breakout is about to occur based on a 5 minute chart and pick the direction on the 1 minute chart.  And even be able to get in early before the crowd!

So what happened?

A breakout is exactly what we got… and it was to the upside like the 1 minute chart pattern suggested!

This means that if you are bullish on your lower timeframe, and the higher time frame is also a bullish pattern, then you are ok to go long this trade.  

 

Wrapping Up

 

So there you have it.  

This is just one example why using multiple time frames will help get you on the correct side of the markets and trading in the direction of the major trends.

So to recap:

  • Multiple timeframe analysis can work on both candlesticks and chart patterns
  • Use the Rule of 4 to 6 to find the correct higher time frame required for your major chart
  • Why it’s important to confirm the pattern or trend on multiple time frames prior to placing your trade
Author:
Ben Sturgill

Ben leads two services at RagingBull. IPO Payday can help you pinpoint, position, and profit from IPOs. In Daily Profit Machine Ben guides day and swing traders to profit by trading the SPY Index. Ben hosts the RagingBull.com weekly podcast WealthWise where he shares thoughts on wealth and success with traders, businesspeople, entrepreneurs, and experts to uncover and share the wisdom needed to live a wealthy life.

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