Tag: News Trading

Multiple Time Frame Analysis

In my years as a trading educator I have found that most losing traders have a critical glaring weakness in their approach to analyzing a market. The majority of their focus is placed on mathematical technical analysis tools such as moving average convergence divergence (MACD), the relative strength index (RSI) and/or stochastic studies (among many others). All of these types of tools are derivatives of price movement and are lagging indicators. To make matters worse, many of these traders attempt to use these tools in isolation and they completely lose focus on reality; indicators don’t move price, price movement moves indicators! Then the nail in the coffin occurs when the trader uses this approach on only one or two time frames (i.e. a 1- and 3-minute chart or a 5- and 15- minute chart).

The problem with this approach is the trader is not focused on why the price is moving in the first place. Price moves occur because there is an imbalance of supply/demand in the marketplace and this imbalance is created from the activity of professional traders. These professionals are very cagey when it comes to disguising their true intentions and hiding their positions from the uninformed retail trader. The average retail trader doesn’t understand how to read a chart in order to determine the underlying strength or weakness in the market. Even for a trained VSA expert, it is nearly impossible to accurately forecast the near-term direction of a market by analyzing a single time frame; there just isn’t enough corroborating evidence if we only look at one or two time frames. Think of each singular time frame as a musical note, when we combine multiple time frame’s together we go from the market blaring out one note noises, to the market singing us a melody and revealing the message that is so often hidden to the trader who can’t read a chart; that message is where the professional traders are positioned. 
Before we move to our chart examples we must understand the following rules of multiple time frame analysis:

1. Each time frame can and will look structurally different from another.
2. The smaller time frame will lead the larger time frame.
3. The combination of activity on the smaller time frames summed together creates the structure of the larger time frames.`
4. The larger the time frame showing strength/weakness the larger the impending move.
5. We use the larger time frame to confirm the smaller time frame’s message; if there is no corroboration we have no confirmation.