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A currency pair exists on several time frames – the daily, the hourly, the 15-minute, even the 1-minute!
When trading we use what we call multiple time frame analysis. This means you do not use only one time frame to place your trade. You will need to look at the next time frame higher so that you can gain perspective on the general trend and then use the lower time frame to make your entry.
This is because the direction of the trend could be different in each time frame. For example EURUSD could be an uptrend in the daily chart and a downtrend in the 4-hour chart. Using multiple time frame analysis will help you minimize losing trades because you will be able to identify where you are in relation to the bigger picture. There could be a new trend emerging from another time frame than the one you are trading in, and if you don’t check it, it could hurt you.
See point B in the figure above, the market is in a downtrend in the 60-minutes after it completed a failure swing. However if you look at the 4-hour chart, you can see that only the wave is down but the trend is still up. So if you just looked at the 60-minute chart you would have sold at the point where the market would recommence its uptrend.
How to Analyze The Market
The proper way to analyze any market is to analyze it in at least two time frames. Note that the pair of time frames you use will be related by a ratio of about 1:4. What does this mean?
For example, you would not use a 1 minute time frame to trade and use it with a monthly chart to look at the trend! This is an extreme example but it demonstrates that you should use one time frame above for the trend versus the time frame you are trading in. If you are a long term trader, use the weekly chart to determine the trend, then go down to the Daily chart to trade. A short term trader will use the Daily for the trend and the 4 hour to trade. In our case we use 4-hour charts to analyze the big picture and 60-minute charts to enter our trades. The trades in the direction of the 4-hour trend are more likely to be winners.
