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Friday, 30 September 2011 19:27 GMT
Deciding which Charts to Use for the Analysis
A question that comes up quite frequently regarding MTFA is how far apart the time frames should be from one another. Here is an example question from today’s webinar: “If you use the Daily, 4 hour and 1 hour, could you then move down to the 5 minute chart for a scalp?”
While using the Daily chart to determine the trend on a pair and then executing the trade from the 4 hour or the 1 hour chart, makes sense, throwing a 5 minute chart into that mix is too much of a disconnect. The Daily and the 4 hour frames of reference are simply too far removed from a 5 minute frame of reference. For example, there are 288 individual 5 minute time periods in a 24 hour period. So we would be looking at a day’s worth of trading data and trying to carve out 1/288th of that to determine our entry. The 1 hour is closer to our objective but still is a bit removed for our purposes.
What we teach is to space the time frames using roughly a 4:1 or 6:1 ratio. Notice how this Daily, 4 hour, 1 hour scenario breaks down: a 4 hour chart is 1/6th of a Daily chart and 1 hour chart is 1/4th of a 4 hour chart.
So in the case of scalping off of a 5 minute chart, I would consider checking a 30 minute chart for the direction to trade the pair. In fact, one of my colleagues, Walker England, has a strategy that looks to the 30 minute chart for trend and uses a 1 minute or a 5 minute chart for timing the entry.
