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Summary: Multiple Time Frame Analysis

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Summary: Multiple Time Frame Analysis

summary-multiple-time-frame-analysis

So now you’re done! Now you can add multiple time frame analysis to your trading tool box! Yeah mannnnn!

Here are a few tips you should remember:

    • You have to decide what the correct time frame is for YOU. This comes from trying different time frames out through different market environments, recording your results, and analyzing those results to find what works for you.
    • Once you’ve found your preferred time frame, go up to the next higher time frame. Then make a strategic decision to go long or short based on the direction of the trend. You would then return to your preferred time frame (or lower) to make tactical decisions about where to enter and exit (place stop and profit target).
    • Adding the dimension of time to your analysis gives you an edge over the other tunnel vision traders who only trade off on only one time frame.
    • Make it a habit to look at multiple time frames when trading.
    • Make sure you practice! You don’t wanna get caught up in the heat of trading not knowing where the time frame button is! Make sure you know how to shift quickly between them. Heck, you should even practice having chart containing multiple time frames up at the same time!
    • Choose a set of time frames that you are going to watch, and only concentrate on those time frames. Learn all you can about how the market works during those time frames.

 

  • Don’t look at too many time frames, you’ll be overloaded with too much information and your brain will explode. And you’ll end up with a messy desk since there will be blood splattered everywhere. Stick to two or three time frames. Any more than that is overkill.
  • We can’t repeat this enough: Get a bird’s eye view. Using multiple time frames resolves contradictions between indicators and time frames. Always begin your market analysis by stepping back from the markets and looking at the big picture.

Don’t believe us? Find out what other traders have to say about finding the best time frame to trade.

source: www.babypips.com
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Time Frame Combinations

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Time Frame Combinations

multiple-time-frame-disorder

Here at the BabyPips.com School of Pipsology, we like using three time frames. We feel that this gives us the most flexibility, as we can decipher the long, medium and short term trends.

The largest time frame we consider our main trend – this shows us the big picture of the pair we wanna trade.

The next time frame down is what we normally look at, and it signals to us the medium term buy or selling bias.

The smallest time frame shows the short term trend and helps us find really good entry and exit points.

You can use any time frame you like as long as there is enough time difference between them to see a difference in their movement.

You might use:

  • 1-minute, 5-minute, and 30-minute
  • 5-minute, 30-minute, and 4-hour
  • 15-minute, 1-hour, and 4-hour
  • 1-hour, 4-hour, and daily
  • 4-hour, daily, and weekly and so on.

When you’re trying to decide how much time in between charts, just make sure there is enough difference for the smaller time frame to move back and forth without every move reflecting in the larger time frame.

If the time frames are too close, you won’t be able to tell the difference, which would be pretty useless.

source: www.babypips.com
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Time Frame Mashup

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Time Frame Mashup

mashup

No, we aren’t about to break out into song like the Glee cast.

Here at BabyPips.com, we’ve got our version of a mash-up, which we like to call the “Time Frame Mash-up”.

This is where multiple or inter-time frame analysis comes in to play.

This is where we’ll teach you how to not only lock in on your preferred trading time frame, but zoom in and out of charts so that you can knock a winner out of the park.

You ready? You sure you can hack this? You’ve basically got a semester left of BabyPips.com High School of Pipsology?

You don’t wanna quit now do you?

Didn’t think so!

First of all, take a broad look at what’s happening.

Don’t try to get your face closer to the market, but push yourself further away.

You have to remember, a trend on a longer time frame has had more time to develop, which means that it will take a bigger market move for the pair to change course. Also, support and resistance levels are more significant on longer time frames.

Start off by selecting your preferred time frame and then go up to the next higher time frame.

There you can make a strategic decision to go long or short based on whether the market is ranging or trending. You would then return to your preferred time frame (or even lower!) to make tactical decisions about where to enter and exit (place stop and profit target).

Just so you know, this is probably one of the best uses of multi time frame analysis – you can zoom in to help you find better entry and exit points. By adding the dimension of time to your analysis, you can obtain an edge over the other tunnel vision traders who trade off on only one time frame.

Did you get all of that? Well, if you didn’t, no worries – we’re gonna go through an example now to help make things a little clearer.

Let’s say that Cinderella, who gets bored all day cleaning up after her evil step sisters, decides that she wants to trade.

After some demo trading, she realizes that she likes trading the EUR/USD pair the most, and feels most comfortable looking at the 1-hour chart. She thinks that the 15-minute charts are too fast while the 4-hour take too long – after all, she needs her beauty sleep.

The first thing that Cinderella does is move up to check out the 4-hour chart of EUR/USD. This will help her determine the overall trend.

eurusd-uptrend

She sees that the pair is clearly in an uptrend.

This signals to Cinderella that she should ONLY be looking for BUY signals. After all, the trend is her friend, right? She doesn’t want to get caught in the wrong direction and lose her slipper.

Now, she zooms back to her preferred time frame, the 1-hour, to help her spot an entry point. She also decides to pop on the stochastic indicator.

trendline-doji

Once she goes back down to the 1-hour chart, Cinderella sees that a doji candlestick has formed and the stochastic has just crossed over out of oversold conditions!

But Cinderella still isn’t quite sure – she wants to make sure she has a really good entry point, so she scales down to the 15-minute chart to help her find an even better entry and to give her more confirmation.

eurusd-trendline2

So now Cinderella is locking her eyes in on the 15-minute chart, and she sees that the trend line seems to be holding pretty strongly. Not only that, but stochastic are showing oversold conditions on the 15-minute time frame as well!

She figures that this could be a good time to enter and buy. Let’s see what happens next.

eurusd-uptrend-end

As it turns out, the uptrend continues, and EUR/USD continues to rise up the charts.

Cinderella would have entered just above 1.2800 and if she had kept the trade open for a couple of weeks, she would have made 400 pips! She could have bought another pair of glass slippers!

There is obviously a limit to how many time frames you can study. You don’t want a screen full of charts telling you different things.

Use at least two, but not more than three time frames because adding more will just confuse the geewillikers out of you and you’ll suffer from analysis paralysis, then proceed to go crazy.

Is there a wrong way to do multiple time frame analysis, you ask? Some of our forex friends have been nice enough to give their two cents on this matter through this forum thread on multiple time frame analysis. At the end of the day, it really is all about finding what works best for you.

source: www.babypips.com
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Long or Short?

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Long or Short?

Before we explain how to do multiple time frame analysis, we feel that it’s necessary to point out why you should actually flip through the different time frames.

After all, isn’t it hard enough analyzing just one chart?

You’ve got a billion indicators on, you’ve gotta read up on economic news, you’ve got basketball practice, a Call of Duty session, a hot date at McDonalds…

Well, let’s play a game called “Long or Short” to show why you should be paying attention and putting in the extra effort to look at different time frames.

The rules of the game are easy. You look at a chart and you decide whether to go long or short. Easy, right? Okay, ready?

Let’s take a look at the 10 minute chart of GBP/USD on July 1, 2010 (7/01/2010) at 8:00 am GMT. We’ve got the 200 simple moving average on, which appears to be holding as resistance.

With price testing the resistance and forming a doji, it seems like a good time to short right?

We’ll take that as a yes.

10min-200SMA

But dang, look what happens next!

The pair closed above resistance and rose another 200 pips!

Ouch! Oh well, too bad!

10min-200SMA-break

What the hell happened? Hmm, let’s hop on to the 1-hour chart to see what happened…

If you had been looking at the one hour chart, you would have noticed that the pair was actually at the bottom of the ascending channel.

What’s more, a doji had formed right smack on the support line! A clear buy signal!

1hour-channel

The ascending channel would have been even clearer on the 4-hour chart.

4hour-channel

If you had looked at this chart first, would you still have been so quick to go long when you were trading on the 10-minute chart?

All of the charts were showing the same date and time. They were just different time frames.

Check out another example of multiple time frame analysis in our forums.

Do you see now the importance of looking at multiple time frames?

We used to just trade off the 15-minute charts and that was it.

We could never understand why when everything looked good the market would suddenly stall or reverse. It never crossed our minds to take a look at a larger time frame to see what was happening.

When the market did stall or reverse on the 15-minute chart, it was often because it had hit support or resistance on a larger time frame.

It took a couple hundred negative pips to learn that the larger the time frame, the more likely an important support or resistance levels would hold.

Trading using multiple time frames has probably kept us out of more losing trades than any other one thing alone. It will allow you to stay in a trade longer because you’re able to identify where you are relative to the big picture.

Most beginners look at only one time frame. They grab a single time frame, apply their indicators and ignore other time frames.

The problem is that a new trend, coming from another time frame, often hurts traders who don’t look at the big picture.

source: www.babypips.com
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Time Frame Breakdown

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Time Frame Breakdown

Well, just like everything in life, it all depends on YOU.

Do you like to take things slowly, take your time on each trade? Maybe you’re suited for trading longer time frames.

Or perhaps you like the excitement, quick, fast paced action? Perhaps you should take look at the 5-min charts.

In the table below, we’ve highlighted some of the basic time frames and the differences between each.

Time Frame Desciption Advantage Disadvantages
Long-term Long-term traders will usually refer to daily and weekly charts.The weekly charts will establish the longer term perspective and assist in placing entries in the shorter term daily.

Trades usually from a few weeks to many months, sometimes years.

Don’t have to watch the markets intradayFewer transactions mean less times to pay the spread

More time to think through each trade

Large swingsUsually 1 or 2 two goods a year so PATIENCE is required.

Bigger account needed to ride longer term swings
Frequent losing months

Short-term (Swing) Short-term traders use hourly time frames and hold trades for several hours to a week. More opportunities for tradesLess chance of losing months

Less reliance on one or two trades a year to make money

Transaction costs will be higher (more spreads to pay)Overnight risk becomes a factor
Intraday Intraday traders use minute charts such as 1-minute or 15-minute. Trades are held intraday and exited by market close. Lots of trading opportunities
Less chance of losing months
No overnight risk
Transaction costs will be much higher (more spreads to pay)Mentally more difficult due to the need to change biases frequently

Profits are limited by needing to exit at the end of the day.

You also have to consider the amount of capital you have to trade.

Shorter time frames allow you to make better use of margin and have tighter stop losses.

Larger time frames require bigger stops, thus a bigger account, so you can handle the market swings without facing a margin call.

The most important thing to remember is that whatever time frame you choose to trade, it should naturally fit your personality.

If you feel a little uptight like you’re undies are loose or your pants are little too short, then maybe it’s just not the right fit.

This is why we suggest demo trading on several time frames for a while to find your comfort zone. This will help you determine the best fit for you to make the best trading decisions you can.

When you finally decide on your preferred time frame, that’s when the fun begins. This is when you start looking at multiple time frames to help you analyze the market.

source: www.babypips.com
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Multiple Time Frame Analysis

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Multiple Time Frame Analysis

timekeeper

What the heck is multiple time frame analysis?

Multi-time frame ana… WHAT?! Chill out young padawan, it ain’t as complicated as it sounds! You’re almost done with high school – now’s not the time to get senioritis, although you probably got that way back in Grade 12. Ha!

Multiple time frame analysis is simply the process of looking at the same pair and the same price, but on different time frames.

Remember, a pair exists on several time frames – the daily, the hourly, the 15-minute, heck, even the 1-minute!

This means that different traders can have their different opinions on how a pair is trading and both can be completely correct.

Phoebe may see that EUR/USD is on a downtrend on the 4-hour chart. However, Sam trades on the 5-minute chart and sees that the pair just ranging up and down. And they could both be correct!

As you can see, this poses a problem. Trades sometimes get confused when they look at the 4-hour, see that a sell signal, then they hop on the 1-hour and see price slowly moving up.

What are you supposed to do?

Stick with one time frame, take the signal and completely ignore the other time frame?

Flip a coin to decide whether you should buy or sell?

Luckily for you, we here at BabyPips.com aren’t about to let you graduate without knowing how to use multiple time frame analysis to your advantage.

First, we’ll try to help you determine which time frame you should focus on. Each trader should trade a specific time frame that fits his or her own personality (more on this later).

Secondly, we’ll also teach you how to look at different time frames of the same currency pair to help you make better, more educated trading decisions.

 

source: www.babypips.com
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How Cross Currency Pairs Affect Dollar Pairs

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – How Cross Currency Pairs Affect Dollar Pairs

Let’s pretend the Fed announces they will raise interest rates. The market quickly starts buying the U.S. dollar across all major currencies….EUR/USD and GBP/USD fall while USD/CHF and USD/JPY rise.

You were short EUR/USD and were pleased to see price move in your favor making you some pips, but right before you were about to break out the cigar, you notice your friend who was long USD/JPY made a lot more pips than you.

You’re like “What’s up with that yo?”

You compare the charts of EUR/USD and USD/JPY and see that USD/JPY made the bigger move. It broke through a major technical resistance level and shot up 200 pips while EUR/USD barely shot down 100 pips and failed to break a major support level.

You’re thinking to yourself, “If the U.S. dollar was being bought across the board, then how come my EUR/USD trade looks so weak compared to my friend’s USD/JPY trade?”

This is due to the currency crosses! In this particular example, EUR/JPY.

When USD/JPY broke through its major resistance level, the combination of stop losses being hit and breakout traders jumping on the bandwagon pushed it even higher.

Since buying more USD/JPY weakens the yen, this would cause EUR/JPY (and possibly other yen-based pairs) to break through its major resistance level, once again hitting stops and attracting breakout traders, pushing EUR/JPY even higher.

This causes the euro to strengthen and slows down the descent of your EUR/USD trade. The EUR/JPY cross buying acts a “parachute” and this is why EUR/USD didn’t move as much or as fast as the USD/JPY.

So even if you only trade the major currencies, currency crosses still have an effect on your trades!

 

source: www.babypips.com
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How to Use Crosses to Trade the Majors

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – How to Use Crosses to Trade the Majors

Even if you don’t ever want to trade the crosses and simply stick to trading the majors, you can use crosses to help you make better trading decisions.

Here’s an example…

Currency crosses can provide clues about the relative strength of each major currency pair.

Let’s say you see a buy signal for EUR/USD and GBP/USD but you can only take one trade.

Which one do you take?

Simply looking at your crystal ball and guessing isn’t likely to result in the right answer.

To find the right answer, you would look at EUR/GBP cross. If EUR/GBP is trending downward, this indicates that the pound is relatively stronger than the euro at the moment.

So the right answer would be to buy GBP/USD instead of EUR/USD due to the pound’s relative strength against the euro.

Since the euro is weaker, relative to the pound, if it proves to strengthen against the U.S. dollar, it is likely to strengthen LESS than the pound.

If the U.S. dollar weakens across the board, GBP/USD you would make more pips since it would rally higher than EUR/USD.

So GBP/USD is the better trade.

blue-monster2
You can do this relative strength analysis on any of the major pairs…

Let’s say you’re bearish on the U.S. dollar. How will you trade?

  • Can’t decide whether to buy EUR/USD or sell USD/CHF? Look at EUR/CHF.
  • Can’t decide whether to buy USD/CHF or USD/JPY? Look at CHF/JPY.
  • Can’t decide whether to buy EUR/USD or sell USD/JPY? Look at EUR/JPY.
  • Can’t decide whether to buy GBP/USD or sell USD/CHF? Look at GBP/CHF.
  • Can’t decide whether to buy GBP/USD or sell USD/JPY? Look at GBP/JPY.

So always remember, looking at cross pairs could give you an idea of the relative strength of a particular currency.

source: www.babypips.com

Euro and Yen Crosses

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Euro and Yen Crosses

After the U.S. dollar, the euro and yen are the most traded currencies. And like the U.S. dollar, the euro and yen are also held as reserve currencies by different countries. So this makes the euro and yen crosses the most liquid outside of the U.S. dollar-based “majors”.

Trading the Euro Crosses

The most popular EUR crosses are EUR/JPY, EUR/GBP, and EUR/CHF.

News that affects the euro or Swiss franc will be felt more in EUR crosses than EUR/USD or USD/CHF.

U.K. news will greatly affect EUR/GBP.

Oddly enough, U.S. news plays a part in the movement of the EUR crosses. U.S. news makes strong moves in GBP/USD and USD/CHF. This not only affects the price of the GBP and CHF against the USD, but it could also affect the GBP and CHF against the EUR.

A big move higher in the USD will tend to see a higher EUR/CHF and EUR/GBP and the same goes for the opposite direction.

Confused? Ok ok…let’s break this down.

Let’s say that the US shows positive economic data causing the USD to rise. This means that GBP/USD would fall, driving the price of the GBP down. At the same time USD/CHF would rise, also driving the price of the CHF down.

The drop in GBP price would then cause EUR/GBP to rise (since traders are selling off their GBP).

The drop in CHF price would also cause EUR/CHF to rise (since traders are selling off their CHF).

Conversely, this would also work in the opposite direction if the U.S. showed negative economic data.

Trading the Yen Crosses

The JPY is one of the more popular cross currencies and it is basically traded against all of the other major currencies.

EUR/JPY has the highest volume of the JPY crosses as of February 2010.

GBP/JPY, AUD/JPY, and NZD/JPY are attractive carry trade currencies because they offer the highest interest rate differentials against the JPY.

When trading JPY cross pairs, you should always keep an eye out on the USD/JPY. When key levels are broken or resisted on this pair, it tends to spill over into the JPY cross pairs.

For example, if USD/JPY breaks out above a key resistance area, it means that traders are selling off their JPY. This could prompt the selling of the JPY against other currencies. Therefore you could expect to see EUR/JPY, GBP/JPY, and other JPY crosses to rise as well.

The CAD/JPY

Over recent years, this currency cross has become very popular, becoming highly correlated with the price of oil.

Canada is second largest owner of oil reserves and has benefited with the rise of oil prices.

On the other hand, Japan is heavily reliant on the importing of oil. In fact, over 99% of Japan’s crude is imported as it has almost no native oil reserves.

These two factors have caused an 87% positive correlation between the price of oil and CAD/JPY.

source: www.babypips.com
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Creating Synthetic Pairs

Best Cash Back Forex Rebates : Learn How to Trade Forex: Foreign Exchange (FX) Currency Trading – Creating Synthetic Pairs

Sometimes institutional traders can’t trade certain currency crosses because they trade in such high volume that there isn’t enough liquidity to execute their order.

In order to execute their desired trade, they have to create a “synthetic pair”.

Let’s say that an institutional trader wants to buy GBP/JPY but can’t because there isn’t enough liquidity. To execute this trade, they would have to buy both GBP/USD and USD/JPY (earlier in this lesson, we learned that these pairs are called its legs).

They are able to do this because there is plenty of liquidity in GBP/USD and USD/JPY which means they can make large orders.

gbjpy-synthetic

If you’re a retail trader, and you wanted to pretend to trade like an institutional trader, then you could technically trade synthetic pairs as well. But it wouldn’t be too smart.

Ever since the great Al Gore “invented the internet,” technology has improved to the point now that even weird crosses like GBP/NZD or CHF/JPY can now be traded on your broker’s platform. Aside from having access to a larger “menu” of currency pairs to trade, the spreads would be tighter on the crosses compared to the synthetic pair you’d create.

And let’s not forgot about margin use! Creating a synthetic pair requires you to open two separate positions and each position requires its own margin. This locks up unnecessary capital in your trading account when you can simply trade the cross-currency and save on margin.

So unless you’re trading yards (slang term for one BILLION units), forget synthetic pairs and stick to crosses. You will be savings yourself some pips (thanks to a tighter spread) as well as freeing up your capital so you can take on more trades.

source: www.babypips.com
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