Trading Using Multiple Timeframes

It is often said there is nothing new in trading, and this is certainly true using a multiple timeframe approach. It is one which has been used by traders for decades. The same could also be said of volume price analysis, which is simply an extension of tape reading. What is perhaps different is that binary option traders rarely consider using multiple timeframes. In my opinion a huge mistake. And extending the concept further, I would suggest not only should this technique be applied to the charts, but also to any associated trading indicators.

Furthermore, the same approach can also be applied to a type of chart rarely used by intraday traders, namely a tick chart. This is yet another powerful way to visualize momentum and activity, as it is created and displayed directly on the chart as the candles develop. Tick charts are devoid of time, providing an additional and powerful way to trade.The concept of trading using multiple timeframes is very straightforward yet powerful, and you can think of it in two ways. The first is in terms of the price action, and the second is in the application.

The analogy I use here is to describe price action in terms of throwing a pebble in a pond. Once the pebble lands the ripples move out and away from the landing point eventually reaching the side of the pond. This is the broad principle of price action when using a multiple timeframe approach. The fast chart reacts first, the price action ripples through to the medium timeframe chart before it finally arrives on the slow timeframe chart.

Any significant changes in price direction moves through the three charts, rather like our three dimensional approach to analysis. In this trading set up it is the medium speed chart which is the focus. It acts as the filter, slowing down the faster price action below, whilst giving a heads up on the slower timeframe above, which is the dominant timeframe. If the dominant trend is bullish, then trading with the trend carries a lower risk, all things being equal. The same is true for a bearish trend.

Whilst there is nothing wrong with trading pullbacks and minor reversals, inherently they carry more risk. For binaries, we are also looking for congestion phases along with trends, and if your slow chart is in a congestion phase with no volatility, any positions taken from your medium speed chart would reflect this view. Using three charts not only helps to reduce the noise of the faster timeframe, but will also give a more considered view of the slower time chart. This principle also works in reverse.

When you have a position in the market based on your middle chart, and are perhaps worried the market may be reversing, a check on the faster time frame will help to clarify the price action in more detail. Using three timeframes to view the price action is simply a way of zooming in and out to enlarge and then reduce the focus. Using this approach will also help with candle patterns. It’s difficult, if not impossible to layer candles one on top of another.

A simple two bar reversal creating a hammer candle is straightforward, but several candles creating the same is more difficult to spot. With multiple timeframes each candle and its importance is defined, along with the related volume profiles and any associated indicators on the charts.In terms of applying this method you can think of this in another way, as driving a car on a three lane highway.

You are in the centre lane with your wing mirrors on either side providing constant updates and information. One is telling you what is happening in the fast lane, the other is telling you what is happening in the slow lane. As the driver in the middle lane, you have the complete picture of traffic flow.The same applies to your trading. You now have the complete picture allowing you to assess risk in the context of the faster and slower timeframes. As you trade you move from fast, to medium up to slow and back to medium and down to fast.

Up and down constantly checking, scanning, analyzing and assessing risk and sentiment as the money flows drive price action back and forth. This principle can also be applied to associated charts and indicators. If you are trading the currency binaries, a currency strength indicator will help you enormously, and here again you can use the same approach. If a currency is rising across all three timeframes, this is a strong signal the trend has momentum.

Equally, if a currency is overbought in a faster timeframe, and appears to be reaching overbought in a slower one, then again this is signaling a possible low risk position. Alternatively, the currencies may all be bunched in the centre of the indicator and if so the markets are in congestion. In fact, I would suggest a currency strength indicator is essential, giving you an insight into every currency in every timeframe from a minute to a month.