Multiple Time Frame (MTF) Analysis (Follow the Trend!)
Introducing Multiple Time Frames
"The big money is made in the big trends.” - W.D. Gann
This morning I want to walk through something I often discuss in my Daily Investor Report. It's called Multiple Time Frame Analysis (MTF) or MTF Trading Strategy when actually incorporated into trading.
First, let's define the term:
Multiple Time Frame Trading Strategy: A strategy to place trades only when at least two time frames of momentum are in the same direction. The basic strategy is to trade in the direction of the larger time frame and execute the trade following a smaller time frame momentum reversal in the direction of the larger time frame.
It comes with two key rules:
1. Trade in the direction of the larger time frame momentum.
2. Execute the trade following the smaller time frame momentum reversals.
Identify Your Time Frames
The first step is identifying at least two time frames for the instrument (currency/stock/option) you are trying to trade. Your time frames should be separated by at least a factor of 4. Therefore, I could use a 15 minute chart with a 1 hour, 1 hour with a 4 hour, 4 hour with a daily, daily with a weekly, or even an hourly with a daily. In the Daily Investor Report is use Daily with a Weekly as seen below:
The goal of using multiple time frames is to identify the momentum of the instrument in the longer time frame and then trade it in the smaller time frame. Therefore, I pick my time frames by first choosing the time frame I want to trade in (the shorter time frame). If I want to day trade over a period of several hours, I'll select a 15 minute short time frame, then multiply by 4 to pick the hourly or 4 hour charts as my longer time frame. If I want further confirmation of a trend, I'll select a third even longer time frame like the daily in the above example.
Rule #1: Trade in the direction of the larger time frame momentum
The idea here is simple, I always want to place my trades in the direction of the larger trend (found on the longer time frames). When you examine pricing patterns you will notice that big trends are generally made of a series of smaller trends like this:
This illustration is exaggerated.
What we are trying to do here is reduce the risk of taking the wrong position by following the bigger trend. We can further reduce our risk by looking at a third even longer time frame to identify that trend.
Rule #2: Execute the trade following the smaller time frame momentum reversals
Here we will discuss both entry and exit points. Entry being where you buy or sell to take up your positions (either in a long or short position) and exit being where your sell or buy to close your position. Once we have the larger trend, we attempt to find the reversal of the shorter time frame trend in the same direction as the longer time frame trend. We then enter our trade once the shorter time frame confirms a reversal buy posting a new high after establishing a bottom (don't guess at the bottom before it shows, this is very risky). We then set our stop loss below the most recent bottom because if the price goes below that then we were incorrect about the reversal and we need to exit the trade before we start taking heavy losses. Illustrated below:
How to exit if you get the trend right?
I suggest that as the trend moves in your direction, you move your stop loss up with the price to points that would show a reversal in the trend. See example below:
I think this technique is safer (keeps your from getting caught in a reversal to your trend) and let's your instrument run with the big trend further than it may have gone it you have tried to guess the top.
Concolusion
Multiple Time Frame Analysis is only a component of larger strategies that require fundamental knowledge of candlestick patterns, momentum indicators and the characteristics of the instrument itself. MTF Analysis is best used to identify valid trends while removing the need to guess are price points in the inefficient (due to low volume) crypto marketplace.
Good Luck Trading. Full Steem Ahead!
Disclaimer
Investors should consider this strategy as only a single factor in making their investment decisions. All investments involve market risk, including possible loss of principal invested.
