How to use multiple timeframe analysis to find better entry and exit points trading with three time frames

Multiple time frame analysis is analysing charts starting with a bigger timeframe going down to a smaller time frame. You look at a currency pair using different time frames. Once you have chosen the exact time frame you want to trade, you then compare it with a higher time frame and a lower time frame to get a clear picture of price movements on abigger time and smaller time.

The bigger time frame will help you define important levels of support and resistance, the current price swing of the main trend, swing highs and lows and any chart patterns forming in the trend.

The lower time frame will help you to know the current movement and how it is reacting to strong support and resistance zone and give entry signal confirmation.

So comparing the two time frames with the one that carries your trading set up, that is the in between time frame, you will be able to get a clear picture whether you should take a trade or not. or whether you should exit or not.

Our main concern right now is to know how you can combine the three time frames to come up with a better entry and exit point when trading.

Previously, we said that the best way to trade multiple time frame is to analyse them starting with a larger time frame going down to a smaller time frame.  We have seen different reasons why you should consider a higher time frame, a trading time frame and a lower time frame.

Now let’s take step by step and try to analyse these time frames spotting out what you should always look for when trading basing on multiple time frame analysis.

We shall take our analysis on NZDUSD and we are trading on a 30 minute chart.

we have decided to consider H4 as the larger time frame and 15 minute chart as a smaller time frame.

Let’s carry on;

When looking at a larger time frame,

  • Identify the current swing of the main trend;  it can either be bullish or bearish. This helps you to analyse the potential market direction a head for the over all trend.
  • Identify and mark potential trading areas such as support and resistance levels or swing highs and lows.

As a trader you should always aim at trading in the direction of the main trend and that can only be achieved by looking at the market at a bigger picture.

Taking a look at our example on the chart above, the market has been trending upwards since 7th December 2017 making successful higher highs and higher lows which is indicates that the buyers are still dominating the market and are still in control. This puts us to a greater advantage if we go long on the pair than shorting it . Since the trend has not shown any weakeness for an ending trend we expect it to advance further so can go long  and grab some profits.

Now that we have identified the trend direction, it’s time to look at our trading set up to see if it qualifies for a valid set up. We are looking at a 30 minute chart which is our trading time frame.

We should be able to determine the risk to reward ratio from here,entry point, stop loss level and the target profit point.

Our trading setup is a break out on a triangle on a 30 minute chart. Since we are trading in the direction of an uptrend, our entry should be at the break out on the upper trend line of the triangle.

Let’s try to analyse the chart below.

From the chart above, price is more on the upside than the downside. The consolidation in the triangle show the battle between the buyers and the sellers. As price gets more on the upper side of the triangle, it signals that there are more buyers in the market compared to sellers. This increases more chances for price to break out on the upper side of the triangle signaling a continuation in the uptrend.

At this point, you can apply your favorite indicator to generate more signal confirmations for our entry before taking a trade.

After using the  MACD indicator, it shows how the MACD histogram has failed to cross over to the downer side below the zero line. This gives a signal that the uptrend is still strong.This calls us to detetermine our entry point for our trade.

Like we said before, we shall use the lower time frame for confirmation entry signal.

Let’s take a look at a lower time frame which is the 15 minute chart.

The 15 minute chart has confirmed the break out on the upper trend line of triangle confirming a buy signal. Since the lower time frame has confirmed the break out, there are higher chances that the trading time frame will also confirm. We can trigger our entry after confirmation on the 15 minute chart to avoid delays for entry or slippages,  alternatively we can wait and trigger our position after confirmation of a break out on the 30 minute chart.

Now let’s see what happened after taking a trade.

After taking our trade, price rallied upwards following the predicted trend direction and hit our target without  any failure.

When trading with multiple time frame you get a clear picture of where price is likely to be by looking at a bigger picture and compare it with where price is now using a smaller time frame. Let’s now see how to trade with three time frames in details.

 

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