A Deeper Look at Technical Analysis and Multiple Time Frame Analysis
Types of Price Charts used for Techincal Analysis and Forex Traders
In layman’s terms, a price chart refers to a graphical representation of the historical exchange rate of a particular currency pair. The Japanese Candlestick chart is one of the most popular and heavily used charts in Forex trading, indicating the open, high, low, and close (OHLC) prices of a particular trading session. A “session” could be from a minute up to months. The high and low prices during the session form the upper and lower shadows of the chart while the open and close prices form the main body of the candlesticks.
There are other popular price charts as well, including bar charts and line charts. An example of a candlestick chart is seen below.
What are Time Frames?
Price charts and time frames go hand in hand. This is because of the data used for high, low, and close prices, usually depend on the selected time frame. Thus, a candlestick chart on a daily time frame usually consists of candlesticks including open, high, low, and close prices for each of the trading days. Similarly, each candlestick which is on a one-minute timeframe includes the OHLC data for the past one minute only.
Both time frames and price charts are major constituents in the concept of technical analysis. Technical analysis refers to a type of market analysis which utilizes the analysis on charts and prices. Before we dive into that, however, we need to first learn about the concept of multiple time frame analysis.
Intro to Multiple Time Frame Analysis
As the name suggests, multiple time frame analysis refers to the analysis of multiple timeframes to get the bigger picture and hopefully taking better trading decisions. It can be considered as a top-down approach to technical analysis, starting from the longest timeframe (monthly) and zooming into short time frames to finetune an entry.
Each timeframe can be considered as solving a part of the puzzle, answering questions such as “is the pair in a long-term uptrend or downtrend?”; “Do we have a correction? “and “what’s going on the 4-hour timeframe” among other questions
As seen in the chart above, longer time frames can be zoomed into shorter time frames, providing us with the necessary information for a trader’s decision-making process. For instance, the strong up move, which is indicated by the green rectangle on the daily chart, can be compared with the higher-highs and pullbacks in the 4-hour chart. The general idea is if there is an uptrend in the daily chart, then we want to trade it when the trend in the short-term timeframe is also upwards. However, when the longer and shorter timeframes are not aligned, we would not trade.
We also want to point out that the general idea is that the trend of the longer-term timeframe, such as the daily trend or weekly trend, is considered to be more important and more persistent than the shorter-term trend. The short-term timeframe will usually be influenced by economic news, and comments, which can quickly turn a trend bullish or bearish depending on the mood and events affecting the markets. Ask anyone trading since 2016 when Donald Trump became the US president and started to use Twitter to communicate his view on domestic and international issues.
In this chapter, our main aim was to cover some popular trading strategies which are based on trend- following, called momentum trading. Most technical analysis tools are designed to identify the trends, as well as trend reversals in the early stages of the market. A trading strategy which is based on trend following can thus be very rewarding if one knows the basics of trends and its proper implementation
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