Directionality: Multiple Time-Frame Analysis


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Video Transcript:

Hello, traders. Welcome to the fourth module of the Advanced Technical Analysis Course: Chart Analysis. In this lesson, we are going to teach you all about directionality and how to use multiple time frame to analyze price action; and by doing this, you will get better entries and better risk to reward ratios setups. So, let’s get started.

What is multiple time frame analysis? The main idea here is to monitor price action on different time frames on your charts. By doing this, you will know the overall direction of price on the higher time frames. It’s important to understand and know the overall directions so you can trade according to it. This will increase the probability of your setups and it will minimize the risk of your positions. And of course, choosing the right timeframes to analyze price action on depends on your trading style. For example, if you’re a scalper, you are trading to the one minute to five minute charts and you are holding your positions for minutes at the most. And, scalpers analyze price action on the fifty minute chart to see immediate direction in price.

But if you are a day trader, you hold your position until the end of the session and maybe you hold your positions for a couple of days and you are trading off the one hour chart, and the four hour chart is the timeframe day traders use to set their levels, but they trade off the one hour chart to get better entries. This means that by analyzing price action on the four hour chart but trading off the one hour chart, you will get better risk to reward ratio setups and you will minimize the risk of your positions and get better entries. But if you swing trade, you hold your positions for weeks and you focus on the overall strength of an asset. And, the chart analysis is made on the daily or even weekly charts. So, it depends on your trading style.

If you are scalping the markets for example, you don’t care about the overall direction on the weekly charts because you are profiting from small movements in price. And on the opposite side, if you are swing trading, you don’t care about the small movements in price because you are holding your positions for weeks and you focus on the overall strength of an asset. Day traders trade off the one hour chart but they analyze price action on the four hour chart because they set their levels on the daily to four hour charts. But by trading off the one hour charts, they get better entries because they don’t have to wait for a four hour candle to close to get their entries. And, what we are going to do here is we are going to go directly into the charts and I’m going to open the empty four platform so I can show you in real time charts, what we are talking about here.

Okay, so here is the Aussie-U.S. dollar multi chart. And, we are going to start with a day trading focus on or a day trading style. And when you are day trading, you can look at the monthly chart but it’s not of important. So if we go to the daily chart, we can see that we are actually in an option. And, the first thing you are going to do is you are going to set your levels on the daily chart, okay? So, we have one level here and we have another level here. So, these are the overall levels that you need to focus on and then, we are going to go back or we are going to go lower to the forward chart. And when you go to the forward chart, you can see that actually, we are trading inside those levels that we set on the daily chart, okay?

And if you are day trading, you are not going to be getting your entries from the four hour chart, you are going to be getting your entries off the one hour chart. And, this is because if you are day trading and if you wait for a four hour candle to close, you might worse risk to reward ratio than if you are trading off the one hour chart. But, if we… we already have our levels of the daily charts, and what we are going to do here is we are going to set levels on the four hour chart and we have a level here, okay? This is the previous high of the four hour chart.

Now, we have the previous high of the four hour chart and as you can see here, it got broken. And then, it got tested right here before price moved about one hundred pips to the outside. This was a great opportunity for us to go long on the Aussie-US dollar, but as we said before, we are looking to get entries on the one hour chart. So, if we go back to the one hour chart, you can see that price actually tests this area and if you set your entries right at the 93, 32 level for example, and you set your stop losses 20 pips below, you will get actually, a one to five risk to reward ratio on the straight and this is what we are talking about multiple time frame analysis and this is an example of a day trader.

Multiple Time-Frame Analysis

Now, let’s take an example of a scalper. A scalper really doesn’t analyze price action on the four hour chart or even the one hour chart, okay? They go to the 50 minute chart because scalpers, they only profit from momentum and small movements to the upside or to the downside, and this is the 50 minute chart, okay? And if you were a scalper, you are going to set your levels on the 50 minute chart. And for example, here, we have a support area, okay? A previous support area that got broken so we are waiting for price to test this area as now resistance.

So, by drawing your levels on higher time frames, you will understand the overall direction in price and you will know where to look for entries. And in this case, on the 50 minute chart, we already know that this was previous support so we are looking for price to test back this level as resistance. And if we go back to the five minute chart, you can see that actually, we have a blue candle here with a wick, a long up wick that signals rejection. And then, we have a long, red candle that confirms the rejection of this level so we can go short right here and put our stops above the previous week. And, this will give us a four pip stop for a 30 pip profit on this scalp.

Adam

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