How to use multi-timeframe analysis in financial trading
The forex market is available 24 hours, 5 days a week. Whilst this availability presents opportunities, it also presents challenges to many traders, the biggest of which is choosing the best time of day to trade. Another challenge is that charts usually behave differently based on the different time settings chosen. For example, a currency pair that shows a sharp upward trend in the daily chart could be in a sharp downward trend in the 30-minute chart.
There are three main trading sessions in the market. The first is the Asian session, which happens between 7PM and 4AM (EST). The most active markets in this session are Japan, Hong Kong, Singapore, and Shanghai. This session is known for its little volatility. However, some market data released during this session from China and Japan usually has implications for the rest of the day. The currencies that experience most volatility in this session are USD/JPY, GBP/JPY, and EUR/JPY.
After the Asian session, the next session is from Europe, between 2AM and 12PM (EST). The most active markets in Europe are in London and Frankfurt. Since London is the world’s financial capital, most trades happen in this period. This session is also important for the contracts for difference market because many commodities are traded primarily in London. A lot of economic data is usually released in this session and the market is often more volatile. The currency pairs with the most volatility in this session are those that include EUR or GBP.
The final session is American and happens between 8AM and 5PM (EST). This session is the most active because the US is the largest economy in the world. Most transactions happen between 8AM and noon. In addition, what happens on Wall Street will often influence what happens in the Asian session. For example, if Wall Street ends the day higher, there are usually chances that Asia will also open the day higher.
Overlaps are periods when two markets are active at the same time. The most active overlap is between 8AM and 12PM (EST) for the Europe and US markets. This is because of the large volumes between the two regions and the fact that most economic data is released during this time. The European and Asian overlap is also very active, but the volumes are less.
A challenge for many traders is choosing which chart timeframe they will use. A good way to solve this situation is to first know what type of trader you are. A scalper is a trader who opens and closes trades within minutes. A day trader is a trader who opens and closes trades within a day. A swing trader leaves a trade open for a few days, while a long-term trader leaves the trades open for more days, weeks or months. Each of these traders relies on different timeframes.
Because a scalper is interested in what will happen within the next few minutes, it is recommended that they use a short-term chart. The ideal timeframes for this are 1-minute and 5-minute charts.
A day trader should use charts between 15-minutes and 1-hour. This gives them room to analyze the market and predict what will happen within the day.
A swing trader should use charts that range between 1-hour to multi-day. This depends on the number of days they are prepared to leave their trades happen.
Long-term traders rely on longer-term charts such as daily, weekly, and monthly charts. They don’t normally need to use extremely short-term charts.
To succeed in forex trading, multi-timeframe analysis is important because it should match the type of trader you are. If you’re looking to start forex trading, easyMarkets is an online broker that provides charts to help you analyse, as well as beginner-friendly guides for new traders.