Many bad trades look great on a 5-minute chart and terrible on a 4-hour chart. Multi-timeframe analysis fixes that by looking at the market from the top down: the higher timeframe decides the direction, the middle one the location, the lower one the timing.
The three-timeframe rule
- Higher timeframe (daily or 4-hour): what is the trend? Where are the big levels?
- Middle timeframe (1-hour): is price at a level where I want to act?
- Lower timeframe (15 or 5-minute): is there an entry signal with a tight stop?
A common ratio is 4 to 6 times between each step: daily / 4-hour / 1-hour for swing trades, or 4-hour / 1-hour / 15-minute for day trades.
The 10-minute routine
- Daily: mark the trend and the two nearest major levels. 3 minutes.
- 4-hour or 1-hour: mark the zone where you would trade and the direction you accept. 4 minutes.
- Set alerts at those zones and close the chart.
- When an alert triggers, look at the 15-minute chart for your entry signal. 3 minutes.
When timeframes disagree
If the daily is up and the 1-hour is down, the 1-hour move is probably a pullback. Wait for it to end at a level and then trade in the daily direction. If you trade against the higher timeframe, take smaller size and closer targets.