Multiple Time Frame (MTF) analysis is a powerful technical process that consists of monitoring the same asset under multiple time frame charts. Traders and investors tend to analyze more than one time frame in order to place their orders in the same direction of the major trend.
The process of analyzing more than one chart, gives the investor the ability to determine the long-term trend of an asset and stay away from short-term trends. These short-term trends are considered by investors as market noise.
For instance, during the day, price goes up, then corrects for a while before going down to close below the day’s open and so one. But the major trend is still up. By using multiple time frame analysis, traders are focusing on the bigger picture instead of trying to catch every move price makes on a chart.
In this article, you will learn what is multiple time frame analysis and I will show you how to use it to trade forex supply and demand.
1. What is multiple time frame analysis?
By definition, multiple time frame analysis is the process of monitoring the same asset or currency pair under different time frames.
For instance, to go long on a currency pair you must wait for at least 2 to 3 different time frames to align in the same direction to buy. If one of the time frames is out of alignment, there is no trade.
The fact that there’s no limit at how many time frames you can use in MTF analysis, there is a general guideline that most traders follow when using this approach in their trading.
Generally, you start by choosing your trading style. This will help you choose the right time frame combination to use in your multiple time frame analysis.
Then, you can select the time frames to monitor your asset or currency pair. Usually, three different time frames are sufficient and they will provide you with all the necessary information to plan and execute your trades.
2. The importance of multiple time frame analysis
Consider the following example, you are interested in buying EURUSD pair on a 1 hour chart. The trend is up and you want to take advantage of this upward movement to make money on the market. So you bought the EURUSD and all of the sudden, the market reversed and started moving down. You look at your buy trade and now you are in the red.
So what exactly happened?
In reality, the currency pair on the 1 hour chart was indeed going up. But if you look at the daily or the weekly chart, the currency pair is still in a downtrend. Therefore, the uptrend on the 1 hour chart was just a correction and price resumed its downward move.
Clearly you missed the bigger picture because you only focused on one time frame to execute the trade. The multiple time frame analysis allows you to see the big picture on a larger time frame, then work your way down to lower time frames to find a good entry level to execute your trades.
3. Trading styles
There are four trading styles that you can choose from based on your strategy and your trading approach.
If you are seeking to make quick money by trading the 1 or 5 minutes charts, then you are a scalper. If you don’t want to stay in front of your computer all day long and you want to catch bigger swing moves on the market, then you can go with swing trading. So choose your trading style that better suits your trading needs and goals.
Here are the four trading styles to choose from:
- Scalping/Intraday trading,
- day trading,
- Swing trading,
- Position trading,
3.1. Scalping/Intraday trading style
A scalper is a trader that is interested in profiting from small price movements by executing multiple trades per day. This trading style requires you to spend all day long looking for short-term opportunities and trade them.
Having a strict risk management strategy is a must when you are a scalper. Because you execute multiple trades a day, you have to protect your trading capital from losing more than you already specified in your trading plan. You should take into account your broker’s fees everytime you place a trade.
If the trade turns a losing one, you should add your broker’s fees and this can make your losses increase instead of keeping them fixed at a certain percentage. For example, if you decide to only risk $10 per trade or 2% from your initial deposit, and if your broker charges you $0.70 per trade, then your loss will be $10.70 per trade instead of $10.
Another thing to bear in mind is the amount of stress you will have to deal with on a daily basis. Price moves quickly on lower time frames. This can increase your risk of losing track of what you should and should not do.
3.2. Day trading style
Day trading is a trading style where traders buy and sell currency pairs within the same day. They usually open and close their positions the same day to make profits.
The difference between scalping and day trading is that day traders hold their trades much longer than scalpers, but close them within the same day. A scalper can open and close multiple trades per day, whereas a day trader opens and closes less trades within the same day.
For example, a scalper can execute around 10 to 30 trades a day, whereas a day trader can have a total of less than 10 trades a day.
3.3. Swing trading style
Swing trading is a less stressful trading style as traders tend to hold their trades as long as the medium-term trend is still valid. This trading style requires patience and a large capital to sustain pullbacks and market corrections.
Normally, trades last between two days to several weeks depending on market conditions.
3.4. Position trading style
Finally, the last trading style is position trading. Traders hold positions for a very long period of time, typically, over several months or years depending on the market conditions.
This also requires a large capital, nerves of steel, and more importantly a deep understanding of fundamental drives. Traders use fundamental analysis to see whether the trend is about to continue or reverse and move in the opposite direction.
4. Time frame combinations
The right time frame combination to use in multiple time frame analysis is based on your trading style. A scalper requires different set of time frames than a swing or a position trader. This is why it is crucial to carefully choose your time frame combination to avoid trading against the trend.
A scalper can use a combination of 15-minutes, 5-minutes and 1-minute charts to analyze and trade the market. The 15-minute chart would be the higher time frame, the 5-minute chart is the intermediate time frame, and finally the 1-minute chart is the lower time frame.
A day trader can use the daily chart as the higher time frame, the 4-hour chart as the intermediate time frame, and the last one is the 1-hour or 30 minute chart as the lower time frame.
A swing trader will need the weekly chart as the higher time frame, the daily chart as the intermediate time frame and the 4-hour chart as the lower time frame.
Finally, a position trader can use the monthly chart as the higher time frame, the weekly chart as the intermediate time frame, and the daily chart as the lower time frame.
The use of three time frames is the right number of charts a trader should consider when using multiple time frame analysis. A combination of less than three or more than three results in loss of pertinent data or confusing the trader.
So, as a rule of thumb, a combination of three different time frames is the best choice when using multiple time frame analysis.
5. Supply and demand with MTF analysis
The supply and demand strategy consists of identifying market imbalances where supply exceeds demand or demand exceeds supply. When the number of sellers is greater than buyers, excess supply drives prices lower – we have a downtrend.
When the buyers outnumber the sellers, excess demand drives prices higher – we have an uptrend.
Part of the supply and demand strategy is to be able to correctly identify and draw price zones where the imbalance is strong enough to move prices up or down in a directional move. This is where multiple time frame analysis comes in handy.
Traders start by selecting the time frame combination based on their trading style. Then they assign to each time frame a specific task to identify and trade supply and demand zones. Here is how you can do it:
Let’s assume that you are a swing trader. The time frame combination that you will be using:
- Higher time frame: Weekly chart,
- Intermediate time frame: Daily chart,
- Lower time frame: 4-hour chart,
After choosing the time frame combination, you need to assign to each time frame a specific task to help you identify, draw, and trade supply and demand zones properly.
5.1. Higher time frame
On the weekly chart, you start by determining the curve. The curve is basically the distance between supply and demand zones in control. It helps us determine whether price is near supply or demand zone on the larger time frame.
This is important as you don’t want to buy when price is high in the curve; near supply zone, or sell when price is low in the curve; near demand zone.
The curve gives you an idea about who’s in control: buyers or sellers. If price is located in the middle of the curve, it’s better not to trade and wait for price to either go up or down to trade accordingly.
So your job is to determine the curve on the higher time frame and see whether you will be considering going short or long.
Learn how to identify supply and demand curve.
Let’s take an example to illustrate the process of determining the curve on a higher time frame.
On the weekly chart, price is located near the higher time frame supply zone. Now, a novice trader will see price moving in an uptrend and going up, so he will think it’s a good time to buy AUDUSD to profit from this nice uptrend.
In the other side of the market, professional traders know that AUDUSD is trading near higher time frame supply zone, so they are preparing to sell instead of buying the currency pair.
Novice traders are buying from professional traders, the latter make money and the novices lose money.
5.2. Intermediate time frame
The second time frame is used to identify the trend. On the daily chart, you identify the prevailing trend to see if it aligns with the higher time frame trend.
If the trend is the same in both the higher and the intermediate time frames, you can move to the third time frame to find entry points to place your trades and execute them.
If the trend is not aligned, you wait until both time frames are sync.
Let’s take a look at the daily chart:
From the chart above, you can see that the trend is up by using a trendline that connects the lowest swing low to the highest swing low. Another way to confirm an uptrend is the use of supply and demand zones.
In an uptrend, a demand zone should cancel an opposing supply zone.
In a downtrend, a supply zone should cancel out an opposing demand zone.
Here on the daily chart, you have the formation of two successive demand zones that cancel out the previous opposing supply zones confirming an uptrend move. Both the higher and the intermediate time frames are in an uptrend. Now you can move to the lower time frame to find an entry to sell the AUDUSD.
If the daily trend was different from an uptrend, you would have to stop here and wait for the trend to start going up and confirm that you have an uptrend move to continue your multiple time frame analysis.
5.3. Lower time frame
On the lower time frame, you need to identify supply and demand zones to find a good entry for your trades. You also need to determine the trend to align all three time frames together in the same direction. The ideal scenario is to find a fresh supply zone (a nested fresh supply zone would be perfect) on the 4-hour chart to short the market.
On the 4-hour chart, there is a fresh and overlapping supply zone between the 4-hour chart and the weekly chart. This is a strong zone because it’s nested inside a larger time frame zone. The larger time frame zone always wins.
Price tested the supply zone and went all the way down to the daily demand zone as a potential target on this example.
As you can see, the multiple time frame analysis gives you a clear picture of what the market is willing to do next so that you can position yourself with the major trend.
- Trading Scenario 1:
[Daily chart: Uptrend, 4-hour chart: Uptrend, and 1-hour chart: Uptrend]
In this scenario, all three time frames are in an uptrend. Price is high in the curve testing the daily supply zone.
On the 4-hour chart, the uptrend is confirmed by the formation of two demand zones canceling out the two opposing supply zones.
On the 1-hour chart, price tested the nested supply zone (daily and 4-hour chart), broke the trendline and hit the two targets (the opposing demand zones below current price).
- Trading Scenario 2:
[Monthly: Uptrend, Weekly: Uptrend, and Daily: Downtrend]
The daily chart has lost momentum and is not aligned with the monthly and the weekly charts. We need to look for nested demand zones between daily and weekly charts if we want to buy.
If we have an opposing supply zone close to current price on either weekly or daily charts, we move to the weekly chart and look for demand zones to buy.
If we have an opposing zone on monthly chart, we wait for the price to reach a monthly demand zone in order to buy. We don’t consider weekly or daily demand zones here, only monthly demand zones.
- Trading Scenario 3:
[Monthly: Sideways, Weekly: Downtrend, and Daily: Downtrend]
What we need to do is wait for the price to test an opposing supply zone on one of these charts. If we don’t have any opposing supply zone, we don’t trade.
On the chart below, we can see that on the monthly price is moving in a tight range.
On the weekly chart, price broke the trend and on the daily chart, we have two opposing supply zones. If price retraces back up and tests one of them, we short.
In this scenario, we have the weekly chart going against the monthly chart. At this point, there is no need to look at the daily chart until we have both monthly and weekly aligned and moving in the same direction.
- Trading Scenario 4:
[Monthly: Uptrend, Weekly: Downtrend]
In this scenario we have a monthly uptrend and a weekly downtrend. The intermediate time frame is not aligned with the higher time frame because price broke the weekly trendline and formed a full candle below it (full candle: OHLC).
In this case, we wait for the price to test an opposing monthly demand zone to buy.
The multiple time frame analysis is a technical system that allows traders to monitor multiple charts of the same asset at the same time to trade in the direction of the major trend.
When trading forex using supply and demand strategy, the multiple time frame analysis gives you the ability to determine the curve to see who’s in control (buyers or sellers), to identify supply and demand zones to trade, and finally, to find good entry levels for your trades.
The goals here are: buying low and selling high, and also trading in the direction of the larger time frame trend.