Multiple Time Frame Analysis
Multi-timeframe analysis is the process of looking at different chart timeframes of the same cryptocurrency to find strong trends and trading signals. This style of analysis has several advantages and is very popular with experienced traders. This analysis is especially useful for trading crypto as it can be traded 24/7.
What Is Multiple Time Frame Analysis (MTFA)
Multiple Time Frame Analysis analyzes the same market on different chart time frames to identify trading opportunities. This technique can be used in stocks, commodities, and forex, but is especially useful for cryptocurrency trading. Traders implementing multi-time frame analysis (MTFA) use longer time frame charts to evaluate larger trends. Traders then drill down to charts with shorter timeframes to optimize their entry or exit. This analysis has several advantages. Reviewing this article you will learn how MTFA works and why it is a necessary tool to use as a trader.
Multi-timeframe analysis helps crypto traders:
- Get a Different View of the Market
- Identify entry and exit points
- Spot trend changes early
- Spot support and resistance levels
- Filter out low probability trades
Get a Different View of the Market
When looking at price action from different chart timeframes, you can see different trends. Some of these trends are reversed. Different perspectives of the market provide more input and data for making trading decisions.
Identify Entry and Exit Points
Analyzing shorter chart timeframes allows early identification of trend changes. This allows you to open a trade before the signal appears on the longer chart timeframe. The same principle applies when exiting a trade.
Spot Trend Changes Early
Focusing on long-term timeframes, short-term trends can start changing before you even see them. For example, lets say you want to analyze and trade using daily charts. If an hourly chart shows a trend reversal, you can use that information to adjust your trades accordingly.
Spot Support and Resistance Levels
When reviewing price charts, we often zoom out far enough to identify key long-term levels that can affect trading. For example, a 5-year trend line may appear on a daily or weekly chart, but not necessarily on a 2-hour chart. Long-term chart trend analysis can therefore help you identify these critical levels and avoid getting caught on the wrong side of trading.
Filtering out Low Probability Trades
Applying multiple timeframes to your chart analysis is a simple three-step process.
- First, identify the trend direction on the longer time frame chart.
- Then look for signals on shorter timeframe charts that match the long-term trend.
- Third, take trades that are consistent with long-term trends.
What are the Best Time Frames to Review for Crypto Trading?
Crypto traders new to technical analysis often wonder which chart timeframe is best to use. The answer to this question depends on the trader's personality and is a matter of personal preference. However, there are some best practices to consider when using multiple timeframe analysis. In general, use long-term trend charts covering a timeframe about 4 to 6 times larger than short-term signal charts.
Let’s review a chart of some time frames that pair well together:
For example, if traders like to trade on hourly charts, consider long-term trend charts such as the 4-hour charts. Another trader who prefers to look for trends on the daily chart will look for signals on the 4-hour chart.
How Technical Indicators Change When Using Multiple Time Frames
One of the main reasons multi-timeframe analysis works is that the indicator output changes when the chart's timeframe changes. Let’s take a look:
As you can see, the left panel above shows a Bitcoin daily chart with a 50 period simple moving average. The right panel of the chart is a 4-hour intraday chart with the same 50 period simple moving average. Did you know that moving averages have different shapes and show different results at the same time? This is because 50 data points are used to calculate the moving average. These 50 points are different when viewing intraday charts and intraday minute or hour charts. When the data changes, the output also changes. Different output values can be used to provide different perspectives on the market.
You can also see at the bottom of the chart that on the left panel of Bitcoin, the chart shows that bitcoin is overbought based on the Stochastics indicator, but on the right panel it is much closer to being oversold. This indicates that in the short term, Bitcoin may be more bullish, but the longer term trend is still bearish.
How Multiple Time Frame Analysis (MTFA) Works
Again, multi-time frame analysis is a simple three-step process.
- Determining Trend Direction on Long Term Charts
- Filtering Signals on Short Term Charts in the Long Term Trend Direction
- Execute the trade
During 2022, Bitcoin has been on a significant downtrend. Since January 8th 2022, Bitcoin has been below the 200 simple moving average, this signals the trend is bearish.
Now when we look back over at the 4 hour chart we see in the short term things look bullish, this could present a shorter term trade opportunity that you wouldn’t have seen had you only been looking at the daily time frame.
The ideal way to trade multiple time frames is to have them sync up so that the short term and long term trend are lined up in the same direction. This is a good confirmation of a trade opportunity by viewing more than time frame to confirm sentiment or a chance to make a smart trade.
Generally speaking, going back to the above Bitcoin Daily/4 Hour example. This setup gives you the opportunity to confirm the trend on the daily chart and then find more opportunities to trade that trend on the 4 hour chart.
You can see via this chart, on the left (Daily) the Stochastics really lined up about 4 times for potential short opportunities. While on the right (4 Hour) you also see 4 times for a potential short opportunity. The difference? The left is 4 months of data and the right is 1 month. Using the shorter time frame to verify trades on the longer time frame can help you enter and exit more trades more often.
Real Scenarios Using Multiple Time Frame Analysis
One of the advantages of cryptocurrencies is that they can be quickly traded in and out or be left to long-term speculation. Multiple time frame analysis can be applied to these trading styles. Let's take a look at four different traders and how they use multi-time frame analysis.
Multi-time frame analysis is especially useful for scalpers. Scalpers usually only trade for a few minutes to a few hours. So, you need to feel some short-term momentum to execute trade opportunities successfully. Scalpers mostly use 1-5 minute signal charts. This means they want to use 10-minute and possibly 15-minute trend charts.
Another important thing for scalpers to consider is to look for markets that are moving behind them with momentum. Because their trading windows are so short, scalpers need the market to move far enough (and fast enough) to overcome spreads, pay trading fees, and make a profit.
As you can see on the above chart, we are looking at Ethereum on the 15 minute chart on the left and the 1 minute chart on the right. Currently you can see the stochastics are both overbought and the 50 simple moving average is at $1258 on the 15 minute chart and $1261 on the 1 minute chart. Using the 15 minute chart to confirm the 1 minute chart, it looks as though this would be an excellent short opportunity as both the stochastics and the SMA are closely aligned and showing the same potential trade.
Day trading is a popular strategy due to the volatile price movements of cryptocurrencies. This method allows traders to enter and exit trades on the same day. Day traders are more likely to focus on the 15 minute to 1 hour trend and use the 5-minute chart to get trading signals.
Here is a good example of a trade a day trader would have taken using multiple time frame analysis. The left panel is showing Ethereum on the 1 hour chart. On the right panel you are seeing Ethereum on the 5 minute chart. Where the arrow is, it is signifying the same time on both charts. As you can see both the Stochastics were overbought late on December 2nd 2022. Also on the chart the 50 period simple moving average was below the price on the hour chart and just crossed below the 50 period SMA on the 5 minute chart. See how the 5 minute chart displayed the Short signal via overbought stochastics and crossing below the 50 SMA and then you confirmed the move via the 1 hour chart displaying the same information? This is how multi time frame analysis can work for you.
Swing traders will be interested in spotting the trend on the daily chart and then moving to the 4-hour chart to determine the best entry and exit signals.
On the left panel we have Ethereum on the Daily chart and on the right panel we have Ethereum on the 4 hour chart. As you can see on November 6th 2022 this trade setup beautifully as the Stochastics were overbought on both the daily and 4 hour chart. Then we could have used the 4 hour chart to signal the trade as soon as the price closed below the 50 simple moving average. This ended up being a huge move to the downside and the reason we would have caught it is due to multiple time frame analysis and verifying the trend.
Long Term Traders
Long term crypto traders can also use multi-timeframe analysis. Their holding period can be several years, in which case you'll want to start with a weekly chart. Long-term holders are not interested in short-term movements and believe that the cryptocurrency industry will continue to receive significant investments in the future. These future investments will create more demand for crypto, driving their prices up.
Here is the Ethereum chart for long term traders, on the left panel we have Ethereum weekly chart and on the right panel we have Ethereum daily chart. As you can see here, we confirm the overbought condition lines up on both the Daily and Weekly chart in November 2021. Then, as always once we have confirmed the trend, we want to use the shorter time frame to execute the trade. In this scenario we would have opened a short using the daily chart once the price crossed below the 50 SMA. As you can see, this was about at $4400. Had we just been using the weekly chart, we would have waited until Ethereum was at about $3000, missing a good bit of the move. This is why you want to use the longer time frame to confirm the trend and the shorter time frame to execute the trade.
Common Mistakes When Using Multiple Time Frame Analysis
Multi-Time Frame Analysis (MTFA) is a versatile and effective tool. However, this is not a universal option and has some limitations. There are two common mistakes I've seen with this analysis style.
First, traders use time frames that are too close. For example, some use a 4-hour chart for trends and a 2-hour chart for signals. There is not sufficient separation between time frames and the benefit of analyzing multiple time frames is lost.
Second, traders use periods that are too far apart. This mistake is often made by scalpers and intraday traders. They may use the 5 minute chart for signals, but check the daily chart for trends. Trends on the daily chart have little effect on trading on the 5-minute chart.
Multi-time frame analysis tends to work best when traders have a ratio between the charts that is near 4:1 or 6:1.
Multi-timeframe analysis is a popular technical tool used by cryptocurrency traders to analyze trends. It is versatile and is used by a variety of traders and styles, from scalpers to long term traders. The biggest mistake traders make when using multi-timeframe analysis is maintaining good spreads between the chart timeframes considered. When traders maintain a 4:1 or 6:1 ratio between the long-term trend chart and the short-term signal chart, they tend to get more stable results.
What if you didn’t have to manually verify this yourself by checking different time frames before executing a trade? To our knowledge, we will be the first ones ever in the crypto/stock/forex trading bot space to have multi time frame analysis built into our trading bots. This is a massive breakthrough in this space and will be a major feature add to our current and future trading bot lineup. Stay tuned for more information.