TRADING with three time frames in forex

Trading with three time frames in forex keeps you out of trouble most times. 

This feels like you already know what happened, what is happening and what is going to happen in the market.

Therefore,

You will be able to trade with a better picture of the market and differentiate setups that are worth taking or not.

You will also be able to determine a good risk reward for your trades. 

You can tell how far the market is likely to move by following the trend on a large time frame.

To choose the right time frames to use, you have to first identify the time frame that has your trading setup. 

Then a smaller time frame and the larger time frame.

How to trade with three time frames in forex

Let’s say for instance you trade only when you spot Head and shoulders on the market chart.

We all know that a head and shoulders is a bearish reversal pattern. Therefore as you prepare to do your market analysis, you have to look into the uptrend scenarios.

First of all,

You have to ask yourself this question, What time frame do you want trade? 

Point it out. Then select a bigger time frame and smaller time frame for comparisons

 Trading with three time frames in forex includes;

1. Bigger timeframe
2. Trading time frame (has your setup)
3. Smaller timeframe

These time frames help you to do analysis without having to spend all your time moving up and down from a 1 minute chart to weekly chart looking for setups.

The larger time frame

This gives you the over all market direction.

You can also use it to identify any major price levels such as support and resistance levels and price highs and lows.

The trading time frame

This is where;

1. You confirm your trades from
2. Determines your stop levels and target levels
3. You monitor trading signals and setups
4.  You apply your market tools and indicators
5. And use the indicators to find all traits and signals that would validate your entry.

The smaller time frame

This helps you to execute your trade entry levels.

It pin points your entry levels

Once you have chosen your trading time frame, do your analysis starting with the larger time frame going down to your trading time frame then to a smaller time frame.

This is commonly termed as the top- bottom approach

In this case, we shall trade on an H1 chart (trading timeframe).  We shall consider H4 or Daily chart as the larger time frame and the 30 minute chart as the smaller time frame .

THE TOP- BOTTOM APPROACH TIME FRAME ANALYSIS

So, we have spotted a head and shoulders pattern on H1(trading time frame).

What next??

Start with the Higher Time Frame chart, and then refer it to your trading timeframe chart, and then to the smaller time frame.

Let’s have a quick look at these charts.

Daily – chart analysis

The red line indicates the support level.

After a strong uptrend, price reversed with an evening star as a confirmation for the beginning of a new trend to the downside.

We wait for a confirmation breakout on support.

H4 – Chart analysis

In comparison with the H1 – chart, the head and shoulders pattern is still forming on H4 chart.

The same pattern is forming on H1.

On the daily chart, we see a new downtrend developing.

We therefore wait for the breakout confirmation below the neckline which is the red line in this case.

H1 – CHART ANALYSIS

Since we are trading on H1 -chart time frame, all our focus should now be here.

As we wait for the breakout confirmation, you can add some other indicators to confirm volatility and price momentum.

As soon as you get confirmation, take position.

The M30 – Chart analysis

We normally look at the lower time frame to pinpoint the entries after the trading timeframe has confirmed the trade.

Small timeframes can also be used do trade management. 

However,

When trading patterns, its easy to set targets and stops.

For the head and shoulders, you look at the distance from the support line to the head and use the same distance as target.

Your stop loss is set just above the shoulders.

After taking trade, you can keep monitoring it in case of any changes in volatility or important news release in that period.

COMMON MISTAKE MOST TRADERS DO WHEN TRADING MULTI TIME FRAMEs

It is so unfortunate that instead of using the top-bottom approach, most traders do the opposite.

They instead analyse from bottom to top.

The problem is that when you start with a bottom to up approach, you will only concentrate on the smaller view trying to justify all the reasons to make your trading setup valid.

You are likely to forget about the larger time frame which should be the most reason you should take a trade. 

 Therefore,

When trading with three time frames in forex, always & always use a Top to Bottom approach