Skill Sheet: What You Will Learn Here
- What is multi-timeframe trading?
- Different timeframes based on trading style
- How traders can choose between different timeframes
- Things to keep in mind while opting for multi-timeframe trading
Multi-timeframe trading is a trading approach where the same stock or security is viewed in different timeframes. The idea behind a multi-timeframe trade is to identify trends in the long-term time frame and accordingly spot appropriate entries or exits in the shorter-term frame. For instance, a trend identified in a larger timeframe, say on a daily chart, is used in a shorter timeframe, say an hourly chart, to plan entry and exit.
Apart from identifying long-term trends, trend reversals can also be identified by marking the long-term support and resistance zones in multiple time frame charts. Once support and resistance are marked in the long-term timeframe, entries and exits can be fine-tuned in the short-term timeframe as well. Multi timeframe trading is an effective way of improving the chances of a winning trade and reducing risk.
Different timeframes for different types of traders
A market encompasses different types of traders with different mindsets and risk capacities. Each trader may be trading in the same scrip but looking at a different timeframe. As discussed above, every trader identifies a trend at a higher timeframe and looks to enter a trade in a shorter timeframe. Following are some common timeframes based on the type of trader:
A scalper may look for a trend in a 15-minute chart for a probable signal and enter into a trade in a one-minute chart and exit in the next few minutes.
A day trader may look at the daily chart for a probable trend and enter a trade by observing the hourly chart or the two-hourly chart. The day trader closes his position before the end of the day's trading session.
A swing trader holds a position for a few days. The objective is to identify a trade by looking at chart patterns. The primary timeframe for a swing trader is the daily chart and the entry or exit chart will be the 4 hourly charts.
A short-term trader holds position for a few weeks and uses the weekly chart to identify a trend and enter/exit in the daily timeframe.
A long-term trader holds position for months; uses monthly charts and enters weekly charts or daily if finetuning of entry/exit are required.
The above multi timeframe is only suggestive.
Few pointers for using multi-timeframe analysis
A multi-timeframe analysis is no doubt a very useful and powerful tool for traders. However, one needs to understand a few things for it to be effective. The most important one among them is the choice of timeframe. While choosing a timeframe the multiple timeframes mustn't be very close. This is because a trend takes time to form. If the timeframes are very close, they will only be like each other. A timeframe which is too wide can also be ineffective. The appropriate multiple or product used by the trader in the market is either 4 or 6. This means if a 15-minute timeframe is used for entry or exit the higher timeframe should be either 60 minutes or 90 minutes. Traders also use a combination of 3-time frames to fine-tune entry and exit. While it is good to fine-tune care should be taken not to exceed more than 3-time frames else the trade becomes ineffective.
Multi timeframe trading gives better trade entries and risk reward ratio. Apart from a macro perspective, it gives the choice of zooming into the micro level and seeing the behaviour of prices. This can help in taking corrective actions or exits. However, many traders find it difficult to choose the multi-timeframe. But this can be easily overcome with practice.