Multiple Time Frame Analysis

MULTIPLE TIME FRAME ANALYSIS

Multiple time frame analysis provides another layer of depth and richness to market analysis. It can place patterns in one time frame in the context of other time frames to better identify those spots where the patterns are more likely to have arisen due to an actual imbalance in the market rather than as a result of random chance. Many traders

assume that higher time frames are more significant; for instance, that patterns on the weekly chart are more important than patterns on 5-minute charts. This is not exactly true—structures on different time frames can take control at any time, and one of the major tasks of analysis is to identify what time frame and what structure are the dominant factors in a particular market at any point in time. There are spots where price action may be completely dictated by what happens on a very short time frame, for instance, 1- or 3-minute charts, and other times when the most important factor might be a level that is visible on weekly or monthly charts. 

We can usually identify a dominant structure or set of structures on one time frame, and can often watch as control is essentially passed from one time frame to another. For instance, perhaps a resistance level is tested multiple times on the 1-minute chart, and then is broken cleanly with a clear consolidation just below the level. At this moment, the 1-minute chart would be in control, but perhaps this breakout happened at the turn of a pullback on the 5-minute chart. We could then say that the pullback on the 5-minute chart and the subsequent trend leg have taken control as the 5-minute chart becomes the dominant time frame. Perhaps the market eventually runs into a new resistance area on the 30-minute chart, at which point we could identify that as the dominant technical structure. 

This discussion could apply without any loss of generality to daily/weekly/ monthly or to any other set of time frames, but the most important point is to avoid that naive assumption that higher time frames are always more important. Work instead to identify the dominant technical structures and to understand what time frame has control. There are two broad areas to this study: the impact of lower time frames on higher time frames and the power of higher time frame structures to shape price action and market structure on lower time frames. 

In practical terms, higher time frame considerations can add confidence to trades, filter other trades entirely, or help to set targets for trades. Lower time frames can help to add precise entry points for bigger, higher time frame patterns, and lower time frame price action can suggest whether support and resistance are more likely to hold or to break on higher time frames. This is an oversimplification, but these factors are the core understanding of how most traders use multiple time frame analysis. This is a difficult subject to teach because traders often attempt to move to multiple time frames before they understand the structures and implications of a single time frame. 

There is some justification for this attempt—patterns become much more powerful when seen in the context of multiple time frames, and a few simple tools can greatly increase the probability of winning trades. However, it is impossible to develop the intuition and skills needed to comprehend multiple time frames unless you can proficiently read the chart of a single time frame. It is important to fully understand the individual building blocks before trying to create elaborate structures. 

The situation is complicated further because much of the written material on this subject lacks clarity. The trend seems to be either toward indicator-based oversimplification (e.g., look for long trades while an indicator applied to a higher time frame shows that the higher time frame is in an uptrend) or toward obfuscation and confusion. Neither is good. Multiple time frame trading cannot easily be reduced to a simple rule set, but there are some commonalities and structures that occur over and over again. This section examines a few recurrent patterns and concepts, and lays a foundation for further exploration. 

Lower Time Frame Structures within Higher Time Frame Context

Earlier in this book, I outlined a useful, but rigid, three-time-frame structure in which the trading time frame was supported by both lower and higher time frames. “Lower time frame” always refers to the time frame below the one being traded, and “higher time frame” always refers to the time frame above the one being traded, with each time frame usually related to its neighbor by a factor between 3 and 5. For now, let’s leave that structure behind for a minute and simply consider two time frames, a higher and a lower, in relation to each other, without designating one specific trading time frame. To understand higher time frame influences on lower time frames, first consider what price patterns create the highest-probability trades on a single time frame. 

There could be some debate, but good places to start would be mean reversion in overextended markets, especially following climax moves; the interface between pullbacks and new trend legs, or the point where new with-trend momentum emerges out of a pullback; higher time frame drives to clear target areas; and failure tests at the extremes of a range, ideally with signs of accumulation or distribution. In the presence of one of these formations on the higher time frame, lower time frame price action and market structure will be molded as prices inexorably move toward a resolution of the higher time frame pattern. A few examples will help to clarify these vital concepts.