As prop traders, we are constantly looking for ways to improve our trading strategies and increase our profitability. One effective way to do this is by analyzing multiple timeframes of an asset before we enter a trade — Multiple timeframe analysis (MTA).
MTA is simply a technical analysis technique that involves analyzing the same asset over different timeframes to identify trends, patterns, and potential trading opportunities.
In this blog post, we will list out the benefits of examining multiple timeframes and how it can help us make better trading decisions. Here are four reasons you should carry out MTA before you take a trade:
One of the key benefits of examining multiple timeframes is to have a comprehensive and complete picture of the puzzle (the market)—you would see what happened, what has happened, what is happening, and predict what will likely happen. With MTA, we get a better understanding of the market’s dynamics and identify trends and patterns that we may not have seen by using a single timeframe.
Another benefit of MTA is better entry and exit points. With MTA, we can identify optimal entry points and exit points that align with the overall trend and direction of the market.
For instance, if we identify a long-term bullish trend on the weekly chart, we can use the daily chart to identify pullbacks and wait for optimal entry points. Similarly, if we identify a short-term bearish trend on the hourly chart, we can use the daily chart to identify potential exit points.
Examining multiple timeframes also helps reduce risk. When we use stop-loss orders based on MTA, we can mitigate losses and align our trading decisions with the overall trend and direction of the market.
If we are long on an asset and the daily chart shows a support level, we can place a stop-loss order below that level. If the stock price breaks below that level, we can use the hourly chart to identify potential entry points for a countertrend trade.
In addition, MTA allows us to confirm our strategy or trading signal. Using different timeframes to confirm trading signals can increase our confidence in our trading decisions and reduce the risk of false signals.
If we spot a buy signal on the daily chart, for instance, we can use the hourly chart to confirm that signal. If the hourly chart shows a bullish candle pattern, we can confirm the buy signal and enter a long position.
To trade with multiple timeframes, you can follow these steps:
In conclusion, multiple timeframe analysis (MTA) can be a valuable tool for traders who want to make more informed trading decisions and increase their profitability.