Topics Strategies
Bybit Learn
Bybit Learn
2 сент. 2021 г.

How to Find Entry-Exit Points Using Multiple Time Frame Analysis

Multiple time frame analysis is a process for reviewing different chart time frames of the same cryptocurrency to find strong trends and trading signals. There are several benefits to this style of analysis, and it’s very popular among seasoned traders. This analysis is especially useful for cryptocurrencies, as they trade 24/7.

What Exactly Is Multiple Time Frame Analysis (MTFA)? 

Multiple time frame analysis analyzes the same market through different chart time frames to identify trading opportunities. This technique can be used with stocks, commodities and forex, but it’s especially useful for trading cryptocurrencies.

A trader implementing multi time frame analysis uses a longer time frame chart to assess larger trends. Then, the trader drills down to a smaller time frame chart to fine-tune their entry or exit. There are several benefits to this analysis. With a little bit of study, it can be easy for you to realize some of these benefits.

Multi time frame analysis helps a crypto trader:

  • Gain multiple perspectives on the market
  • Filter out lower probability trades
  • Spot support and resistance levels
  • Spot trend changes earlier
  • Identify an entry point and exits trades earlier

Gain Different Views on the Market

Since you’re reviewing price history from various chart time frames, you can see different trends. Some of these trends will be opposites. The variety of perspectives of the market provides more input and data to make a trading decision.

Filter Out Lower Probability Trades

Applying multiple time frames to your chart analysis is a straightforward three-step process. First, identify the direction of the trend on the longer-term chart. Second, look for signals on the smaller time frame chart that align with the longer-term trend. And third, place the trade that agrees with the longer-term trend.

This process filters out short-term counter-trend signals, which have a lower probability.

MTFA Helps You Spot Support and Resistance

Oftentimes, when we’re reviewing a price chart, we don’t zoom out far enough to identify longer-term key levels that may affect our trade. For example, a 5-year trend line would be visible on a daily or weekly chart, but not necessarily on a 2-hour chart. Therefore, the longer-term chart trend analysis can help you spot these key levels so you can avoid getting caught on the wrong side of a trade.

Spot Trend Changes Sooner

When you’re focused on the longer-term time frame, the shorter-term trend may begin to change before you see it. For example, let’s say you like to analyze and trade using the daily price chart. If the shorter-term time frame chart, such as the 1-hour, were to signal a trend change, you could use that information to adjust your trade accordingly.

Identify Entry Points and Exit Trades Earlier

Just as the previous benefit suggests, when you analyze a smaller chart time frame, you can see trend changes earlier. This allows you to jump into trades before the signal appears on the longer chart time frame. The same principle holds true for exiting the trade.

Why Technical Indicator Results Change When Used in Different Time Frames?

One of the biggest reasons why multi-time frame analysis works is that the indicator’s output changes when the chart time frame is changed. 

Depending on your preferred time frame, for example, in the left panel above we see a daily chart for Bitcoin, with a 200-period simple moving average. The right-hand panel of the chart is a 4-hour intraday chart, with the same 200-period simple moving average included. Do you notice how the moving average has a different shape and displays different results simultaneously?

This is because there are 200 pieces of data going into the moving average’s calculation. Those 200 pieces of data are different when you’re looking at a daily chart, versus intraday minutes or hourly charts. As the data changes, so does the output.

We can use different output values to provide us a different perspective on the market. 

How Multi Time Frame Analysis Works

Once again, multiple time frame analysis is a simple three-step process.

  1. Identify the direction of the trend on a longer-term chart
  2. Filter signals from the shorter-term chart in the direction of the longer-term trend
  3. Make the trade

During 2020–2021, Bitcoin was on a monster trend to the upside. From April 29, 2020, to May 19, 2021, it traded above the 200-period simple moving average, signaling the trend was up. This is the longer-term chart that filters out trends for long and buying opportunities.

Now we scroll down to Bitcoin’s intraday chart, like the 4-hour time frame or (four-hour chart). At this point, we’re only going to look for buying signals from the relative strength index (RSI). Ignore the sell/short signals. Focus only on the long signals.

Several signals are given over Bitcoin’s 12-month uptrend. Some of the signals will work out, and some of the signals will end up as losing trades. However, the opportunities to buy Bitcoin on the 4-hour chart are plentiful, whereas a trader focused solely on the daily chart will not witness any RSI signals.

Once you have the analysis complete, then step 3 is to make the trade.

Identifying the Best Time Frame for Crypto Trading

Crypto traders who are newer to technical analysis often wonder the best chart time frame to use. The answer to that question depends on the personality of the trader and is a matter of personal preference. However, there are some best practices to consider when using multiple time frame analysis.

Generally speaking, you want to use a longer-term trend chart that covers a time frame about 4–6 times larger than the shorter-term signal chart.

Longer-term Trend ChartShorter-term Signal Chart
4-Hour or 6-Hour1-Hour
Table: Common Multiple Time Frame Analysis Chart Combinations

For example, if a trader likes to make trades based on the 1-hour chart, then consider a longer-term trend chart, such as a 4-hour or 6-hour chart.

Another trader, who prefers to find trends on a daily chart, will look at the 4-hour chart for signals.

Real Case Examples

One of the benefits of cryptocurrencies is that you can trade them in and out quickly — or hold them for long-term speculation. Multi time frame analysis can be applied to any of these styles of trading. Let’s look at four different traders, and how they might use multi time frame analysis.

Using Multi Time Frame Analysis When Day Trading

Day trading is a popular strategy, owing to crypto’s volatile price movements. This method allows the trader to get into and out of the trade the same day. A day trader will likely focus on the 30-minute trends and use the 5-minute chart for signals.

In the chart above, the trader applies the 200-period simple moving average to the 30-minute chart of Ethereum to determine the longer-term trend for day trades. This is the equivalent of finding the trend for the past four days. The trader spots a nice trend on July 27, where Ethereum holds up above the moving average.

The trader shifts down to a 5-minute chart and applies an indicator, such as the Commodity Channel Index (CCI). When the CCI crosses up above −100, it’s a signal to buy. Since the trader has determined from the 30-minute chart that the trend is up, the focus will only be on the buy signals, ignoring the sell signals.

Multiple Time Frame Analysis Strategy for Swing Traders

Swing traders are going to be interested in determining the trend on a daily chart, then swinging down to a 4-hour chart to identify better entry and exit signals.

The Donchian channel is a tool made popular by the Turtle Traders back in the 1980s. When markets trend for long periods, Donchian channels can offer a way to determine the trend and follow it.

Once the price reaches the upper channel, then the market is considered in an uptrend. This uptrend stays in force until the prices fall to reach the lower channel. From the time the market reaches the upper channel until dropping to the lower channel, the trader will want to filter trades for buy entries.

Using the same Donchian channel tool but changing the input value to 60, we can use the upper and lower bands as our entry and exit points, respectively.

Once we are in a confirmed uptrend, shift down to the 4-hour chart and buy when the market breaks above the upper band. The stop loss will be set at the lower band.  

Long-Term Traders/HODLers

Cryptocurrency HODLers can use multiple time frame analysis, too. Their holding period maybe years, in which case they‘ll want to start with a weekly chart. Long-term holders aren’t interested in short-term movements and believe that the cryptocurrency industry will continue to receive a vast amount of investment into the future. This future investment will create even more demand for cryptocurrencies, pushing the prices higher.

This increase in demand swallows up the available supply of coins — especially when you consider a cryptocurrency like Bitcoin that has a limited supply. As a result, the pricing must be readjusted higher.

As long as the weekly chart keeps printing higher highs and higher lows, the trend is viewed as upward. The HODLer can then use the daily chart to determine if the market is becoming overbought, and is, therefore, due for a correction. It’s common for cryptocurrencies to correct at least 80%, so taking some profits might be a good idea from time to time.

After large rallies, Bitcoin and most other cryptocurrencies experience a large correction to consolidate those gains. A HODLer will be interested in momentum tools like moving average convergence divergence (MACD), moving averages or price channels to identify entry and exit points.

MACD is a versatile tool that can help describe the market’s behavior. For example, when the MACD line crosses below zero, this signals that the daily trend may be shifting from up to down. For a HODLer who is long, this will signal a possible correction, and it may make sense to take exposure off the table.

On the other hand, if the MACD line breaks above zero, then this signals the trend is shifting upward. In this case, consider adding more cryptocurrency exposure.

Ideal Time Frame for Scalpers to Find the Best Entry/Exit Points 

Multiple time frame analysis is especially useful for scalpers. Scalpers are generally in their trades for only a few minutes or less. Therefore, they need to gain a sense of the near-term momentum so they can pick up a couple of points.

Scalpers are likely to use a 1-minute to 3-minute signal chart. That means they’ll want to use a 10-minute and possibly 15-minute trend chart.

Another important consideration for scalpers is to find markets that are moving with momentum behind them. Their trading periods are so short that scalpers need the market to move far enough (and quickly enough) in order to overcome the spread, pay for trading fees, and generate a profit.

Applying an 8 EMA and 34 EMA to a 15-minute chart for Bitcoin, look for the 8 EMA to be consistently on one side of the 34 EMA. Use that direction as your trend. The 8 EMA has been consistently below the 34 EMA in the chart above, suggesting the scalping trend is down.

Next, zoom in on the 3-minute chart for Bitcoin and look only for bearish signals. A bearish signal is when the price crosses below the 8 EMA while it’s below the 34 EMA. If the market is in a strong trend, there will be plenty of signals, and the position will quickly move into an adequate profit target.

The key for scalpers is finding the crypto market that’s moving rapidly so they can quickly overcome the spread and other trading costs.

Things to Avoid When Using Multiple Time Frame Analysis

Multi time frame analysis is a versatile and effective tool. However, it’s not one-size-fits-all, and there are some limitations. There are two common mistakes I’ve seen with this style of analysis.

First, traders use time frames that are too close together. For example, they’ll use a 4-hour chart for the trend and a 2-hour chart for the signal. There’s not enough separation between the time frames, and you lose the benefit of analyzing multiple time frames.

Secondly, traders use time frames that are too far apart. This mistake tends to happen with scalpers and day traders. They’ll use a 5-minute chart for signals, but check the daily chart for trends. The daily chart’s trend has little impact on your 5-minute chart trade.

Multiple time frame analysis tends to work better when traders stay close to the 4:1 or 6:1 ratio between daily charts, as recommended above.

The Bottom Line

Multiple time frame analysis is a popular technical tool used by cryptocurrency traders to analyze trends. It’s versatile and is used across a wide variety of traders and styles, from scalpers to HODLers.

The biggest mistake for traders when using multi time frame analysis is maintaining a good spread between the chart time frames reviewed. When traders maintain a 4:1 or 6:1 ratio between longer-term trend charts and shorter-term signal charts, they tend to see more consistent results.