Every chart you look at is one zoom level of the same market. A move that looks like a crash on the 5-minute chart can be a small pullback on the daily. Multi-timeframe analysis uses several zoom levels together, so you trade in the direction of the bigger picture with the precision of the smaller one.
Top-down analysis
Most traders use three timeframes, each with one job.
- Higher timeframe: direction. What is the trend? Where are the major support and resistance zones?
- Middle timeframe: location. Has price reached an area where you want to act, such as a pullback into support?
- Lower timeframe: trigger. Is there a precise entry signal, such as a pattern or a small break of structure, with a tight stop?
Choosing your timeframes
A common rule of thumb is to keep a factor of roughly four to six between timeframes, so each one shows meaningful detail the one above doesn't. Your trading style from Module 1 sets the starting point.
| Style | Direction | Location | Trigger |
|---|---|---|---|
| Scalping | 1 hour | 15 minute | 1 minute |
| Day trading | 4 hour / daily | 1 hour / 15 minute | 5 minute / 1 minute |
| Swing trading | Weekly | Daily | 4 hour / 1 hour |
| Position trading | Monthly | Weekly | Daily |
When timeframes disagree
They often will. The daily is in an uptrend while the 1-hour is falling: that's a pullback, and it's exactly what you want to buy at a good level, once the lower timeframe turns back up. If the daily trend itself has broken, the higher timeframe wins: stop looking for buys, however good the 5-minute chart looks.
Key takeaways
- Use a higher timeframe for direction, a middle one for location and a lower one for the entry trigger.
- Keep a factor of about four to six between timeframes, chosen to match your trading style.
- A lower-timeframe move against the higher-timeframe trend is usually a pullback to trade with, not against.
- The higher timeframe has the final say; pick your timeframes before the session and stick to them.