Multi-Timeframe Analysis (MTF)

Many traders observe that if you consult the price action in three different timeframes and trade only when all three agree, you will reduce the number of losing trades. You will also reduce the number of total trades, and that is probably why the multi-timeframe discipline is not as widely followed as it could be.

The exact combination of timeframes does not matter — you can use one hour (H1) and 6 hours (H6), or two hours (H2) and one day (D1), or one day (D1) + one week (W1) + one month (MN), or whatever suits your fancy. The key point is confirmation. Because we have pullbacks and false breakouts in Forex, consulting multiple timeframes improves the chances of identifying any particular move correctly.

In Forex, where most traders are day traders (having a holding period of less than one day), the most commonly used timeframe combinations are:

• 5 (M5) or 15 minutes (M15)
• 1 hour (H1)
• 4 hours (H4)

Another popular set is:

• 5 minutes (M5)
• 15 minutes (M15)
• 1 hour (H1)

Case Study

The chart below shows the GBP/USD on a 5-minute timeframe. The GBP is rallying strongly. Should you buy for more up move? The stochastic in the middle window indicates the GBP is entering an overbought state in this timeframe, although the MACD shows it has room to run to the upside. What this chart is telling you is that you are late for this move.

Now, look at the same information on the 15-minute chart. In this view, the pound is not overbought in the stochastic, and MACD has room for upside.

Finally, check out the indicators on the 60-minute (H1) chart. This one adds the Fibonacci sequence and shows that the pullback ended a little short of the 25% retracement level. Therefore, the upward bounce is likely to be robust. How robust? At least to the hand-drawn red resistance line. Note that you do not have to believe in the theories behind the Fibonacci sequence to use the lines to gauge the extent of a pullback.

Should We Buy the GBP?

In this instance, we have agreement in one indicator (MACD) across all timeframes that buying the GBP here is a good trade. Ideally, you want another indicator to agree with the MACD, and it is so for the most part here, except for the 5-minute timeframe. If we believe the stochastic, the trend is to the upside, but the move is already overbought on the shorter timeframe and may halt at any minute. So, if we make the long GBP trade, we can either wait for the price to exit the overbought state on the 5-minute timeframe to buy on the pullback or buy now, assuming that the potential pullback will be short-lived and the price will continue to move higher on the longer timeframes. In either case, the hand-drawn red resistance gives us a profit target.

Using multiple timeframes is a tried-and-true technique that reduces errors, even if it is an additional time-consuming step. It is not all that time-consuming though – you can learn to toggle between different timeframes very quickly on your charts. If you are using trend-following indicators, multiple timeframes are most helpful when prices are trending and less useful or downright misleading when prices are range-trading.