Multiple time frames in trading imply that a trader does not use one particular time frame while trading. The reason is the value of a stock may behave differently under different time frames; it can be 1 minute, 15 minutes, daily or hourly chart. Therefore, identifying a right junction at different levels of time frame is crucial for a trader to evaluate the best investment strategy.
Under trading, this analysis is known as the concept of multiple time frame trading. A trader will be required to look to both the higher and the lower side of a time frame to make the utmost gain and to decide the entry-level respectively.
So the first question that a trader needs to answer is which time frame will he select to pitch in his trading strategy?
Different time frames may witness a different trend direction. Hence, a trader needs to analyze the trend along with the time frame to identify the winning trade.
For instance, a currency pair could be an uptrend in an hourly chart whereas at a downtrend in a daily chart. This concept helps a trader greatly to identify its position in relation to the market scenario. It thereby filters the trading strategy for a trader and allows making the most accurate decision after observing the time frame along with the direction of the trade.
How to select the time frame?
Now firstly you need to pick up your trading time, which shall work as a base for you. Basis this base trading time, you need to decide on the higher and the lower time frame to trade. So if you select a base trading time as the 15-minute chart, then the higher time frame to be used will be a 30-minute chart and the lower time frame to be used will be a 5-minute chart.
Now based on your trading strategy you need to decide as to what you are looking for in each time frame. So if a trader is looking to buy a breakout at a 30-minute chart, he needs to be assured that the stock is strongly trending at the 60 minute and 15-minute chart. This means that both the higher and lower time frames decided should move in the same direction. In case they do, then the trader will have wait for the right time.
The next part is to note that while you choose different time frames to make a winning trade, you will always have to decide upon your entry and exit levels based on a particular time frame only. Keeping that particular time frame in mind, you can decide to buy or sell a stock. Always remember that the selecting the upper and the lower limit to your time frames, gives you an idea as to whether your trading strategy is workable or not.
As mentioned above, we have used three-time frames to analyze the market by setting up the upper, lower and the base time frames along with the direction of the trend to choose the right trade. Now let us understand as to how we chose these time frames. The best way to choose the time frame is with the help of commonly used ratio of 1:4.
For instance, if you are a long-term trader, so definitely you may use a monthly chart and then go down to weekly or a daily chart. So if you trade short term, you may use a daily chart and then an hourly chart to trade.
So in that case, as we have mentioned above, when you use the 60-minute chart, you can use a 15-minute chart (60/4 = 15 minute) in deciding the time frame.
No matter whatsoever your trading style may be, always choose the time frame corresponding to your trading style so as to grab a win-win situation.