Many new forex traders simply walk away from multiple time frame analysis in pursuit of a strategy that yields profits more quickly, but Casey Stubbs of WinnersEdgeTrading.com believes that—with a little patience—following the trends can be a more profitable approach.
Compressing time to better analyze forex trends is a long standing approach to choosing when to enter a trade. This gives a much clearer picture of the directions your currency pairs are going and when those directions can be expected to change. A trader who is trying to study a real time chart is going to have a hard time making those distinctions.
In order to make time trend trading work for you, you need to break the habit of single time trend trading. This is where you are only looking at the data as it is compressed into one period of time, whether it be short-term or long-term. To better serve your purpose of earning a profit in the forex market, you need to be studying the trends of your currency parties as they form in different time compressions.
Setting Up Multiple Time Frames
To make multiple time frame analysis profitable, start by dividing your charts into three categories, a long-term trend, medium-term trend, and short-term trend. I follow the same rule as most other traders I know, which is to space your time trends by multiples of four. So if, for example, I were to use the one hour chart for my short-time frame, the medium would be four, and the long-term trend chart would be the 16 hour one.
Using three different time periods is generally ideal for the forex market. One or two would cause you to lose out on important details, and any more than three charts and your data is becoming redundant.
Reading the Multiple Data
When reading your collection of charts, you will typically want to start with the long-term trend first. Long-term trend charts allow you to clearly see where the dominant trend has been established. Don’t consider taking positions based on the information from a long-term chart alone, but note the direction of the trend for when you are ready to enter.
Your medium-trend time chart is the one you will refer to the most. This gives a visual of the smaller moves taking place with your currency pair and will serve as your guide when choosing your targeted profit and stop loss. Since you have already established the trend from your long-term trend chart you will now be looking for the medium-term price action to be in alignment with the long-term trend. Once that happens, you can study the short-term trend chart to find a good starting position and choose your stop loss and exit strategy.
Your short-term trend chart gives you a good reading of the support and resistance levels for your pair as well as the entry and exit points that are most profitable.
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With the data from your three time trend charts combined, any trade you make off of the analysis has a better opportunity for success. You can use short trades when the larger-trend is traveling upwards while the medium- and short-term trends are bouncing down. Just make sure you have realistic profit targets and definitive stop losses in place.
I am a more patient trader and prefer to wait until all three of my time trend charts are aligned and are heading in the same direction. This allows me to enter the trade at the beginning of a long incline and wait until it almost runs its course before pulling out.
When you adopt the system of trading using multiple time frames, you are adhering to the buy low and sell high principle but at a more advanced level. It is encouraging you to follow the trends and only enter trades that favor them.
Factoring in Patience
Multiple time frame analysis is considered to be one of the more accurate tools, but one that relies on patience and time to profit from. For this reason, many new traders will eventually walk away from it in pursuit of a strategy that yields profits more quickly.
When I see that kind of trading attitude, I automatically know that the end result for that trader will be a strategy which ignores risk to reward ratios and concrete stop loss orders, putting him at high risk for a losing streak. The multiple time frame analysis incorporates all of those basic tools, making it the less risky trading strategy option.
Following the trends is a simple yet profitable approach to forex trading. When you apply all of the principles you should have already adopted into your trading strategies, the invested time you put into studying multiple trend charts will be well worth it.
By Casey Stubbs, Founder, WinnersEdgeTrading.com
