Multiple Time Frame Analysis (MTF) in the "Follow the Market" strategy
Analysis of several timeframes in the "Follow the market" strategy provides a broader view of the market and improves the quality of the assessment of the dynamics of the traded asset quotes.
How MTF strategy works
The market moves in several time periods at the same time, so any quotation signal analyzed by a trader consists of many rhythms with different periods, and rhythms are not constant: they appear and disappear during their evolution in time. It can lead to contradictions in market tendencies (trends) depending on time period which is used by a trader as a basic one. For example, on the main period the trend is "ascending", but at the same time there are medium-term and short-term "descending" trends on other periods.
The main recommendation given in various publications: to apply the analysis of several timeframes using the "top-down" method (from larger to smaller), that is, to use the technique of several timeframes (the technique MTF).
That said:
- higher timeframes in relation to the main trend are used to determine the main trend, i.e. to confirm the working trading hypothesis.
- The younger ones - to determine the short-term trend and to improve the moments of entry and exit into transactions.
- Main working timeframeThe trading hypothesis ("medium-term trend") is actually needed for the realization of the working trading hypothesis.
It is believed that a longer timeframe is always more important than a shorter one, or otherwise a weekly trend is stronger than a daily one, and a monthly trend is stronger than a weekly one.
This opinion is due to the fact that the range of rhythms that make up the quote signal usually increases in magnitude (amplitude) with increasing periods of these rhythms, which is almost always observed for the quote signals of different traded instruments.
When moving to longer timeframes, the smaller rhythms of the quote signal are absorbed by the "body of the candle" and the smaller rhythms are no longer observed explicitly, but only determine the boundaries of the "body of the candle". In an explicit form, observed only the longer rhythms. Their magnitude (amplitude) is almost always greater than that of small rhythms, hence the conclusion that a longer time frame is always more important (more weighty) than a shorter one.
Interestingly, the technique of using multiple timeframes in trading (MTF strategies) in digital signal processing is called multirate processing (multirate processing) and is widely used.
Example of an MTF strategy for EUR/USD
Let's analyze the EUR/USD currency pair using the MTF technique. We will analyze several timeframes: MN, W1, D1, H1.
As part of the analysis we will consider the process of nucleation and formation of the signal rhythms of quotes with different periods in the transition from a longer timeframe to a shorter one, that is, using the "top-down" method.
In this transition the settings of the used technical indicators are not changed. All quotation charts end with the same date - June 23, 2018.
Analysis on the time frame "month" (MN)
Let's start with the monthly chart of EUR/USD. Figure 1 shows a chart of the currency pair exchange rate (Monthly, end date June 23, 2018).
To select and analyze the older, longer rhythms on the chart of EURUSD quotes (timeframe MN), we use a two-layer system of technical analysis RAIQS.
The RAIQS technical analysis system was previously discussed in detail in the articles: RAIQS system for implementing the "follow the market" strategyas well as Following the market according to the RAIQS system of four indicators.
In this example, the two-layer RAIQS system used is composed of two layers, each layer consisting of four indicators (RAMA, RASL, RAOS, RAOSQ).
The first layer (fast) is shown in Figure 1:
- moving average RAMA(9) (red line),
- RASL(4, 17) layer indicator (orange lines),
- RAOS(9) oscillator (speed of moving average RAMA, blue lines),
- RAOSQ(9) quadrature oscillator (RAMA moving average acceleration, yellow and green lines).
The second layer (slow) is shown in Figure 2:
- Moving Average RAMA(18) (black line),
- RASL(12, 36) layer indicator (gray lines),
- RAOS(18) oscillator (speed of moving average RAMA, magenta lines),
- RAOSQ(18) quadrature oscillator (RAMA moving average acceleration, thin black lines).
The two-layer RAIQS assembly is shown in Figure 3, which combines Figures 1 and 2.
The display of two layers in Figure 3 (as well as in all the following figures) makes it possible to present the dynamics of the analyzed quote signal in a generalized way as a superposition of two "fast" (Figure 1) and "slow" (Figure 2) dynamics.
"Slow" dynamics displays the global rhythm, that is, it displays the main trend trends. "Fast" dynamics displays a "faster" rhythm "embedded" in the "slower" dynamics and forms "pullbacks and rises" within the main trend trends set by the "slower" dynamics.
On the monthly chart in Figure 3 you can see that after the downward movement is formed correction signal: the quotes at the lower reference boundary of the slow RASL layer (gray lines) and "slowing" of the downward movement - the signal of the quadrature oscillator of the fast RAOSQ layer (yellow and green lines).
In more detail, the "slow" dynamics in Figures 2 and 3 shows that in a downward movement the quotes have approached the lower boundary of the "slow" dynamics (the lower boundary of the slow RASL layer (gray lines)). At the same time according to the "fast" dynamics Figures 1 and 3 show the formation of correction signal ("slowing down") of descending movement - the quadrature oscillator fast RAOSQ layer (intersection of the yellow and green lines).
Analysis on the time frame "week" (W1)
At the next stage of the analysis we move to a shorter timeframe - weekly (W1). We expect that in this case the faster, shorter rhythms typical for the weekly timeframe (W1) should appear.
Figure 4 shows the EUR/USD exchange rate quotes (Weekly, end date June 23, 2018).
In Figure 4 the correction signal, formed in Figure 3, after the downward movement can be observed in a more expanded form: the indicators of the slow layer confirm the development of the correction (RASL (gray lines), RAOS (magenta lines, reversal up), RAOSQ (thin black lines, reversal up)). Fast layer indicators show more "fast periods" - rises and pullbacks.
At the completion point of Figure 4 we see that we are in a "pullback down" position (according to "fast layer" indicators) inside a more "global" reversal "up" (according to "slow layer" indicators). That is, from the "pullback down" we expect the continuation of the movement "up".
Analysis on the time frame "day" (D1)
At the next stage of the analysis we move to an even shorter timeframe - daily (D1). We expect the manifestation of even faster, shorter rhythms, typical for the daily timeframe (D1).
Figure 5 shows EUR/USD exchange rate quotes (Daily, end date June 23, 2018).
In Figure 5 you can see that by the "slow" dynamics from the beginning of the "up" reversal the quotes are further in the upward movement, which shows the consolidated "upward" reversal of the quadrature oscillators RAOS (purple lines) and RAOSQ (thin black lines) of the slow layer.
Upward movement is also observed by indicators of a fast layer. But the upper boundary of the slow RASL layer has been reached (gray lines), so we expect the signal to "roll down" on the fast layer oscillators, and then the continuation of the upward movement "in the average", in accordance with the beginning of the upward movement by dynamics on the W1 timeframe (Figure 4).
Analysis on the time frame "hour" (H1)
At the next stage of the analysis we move to an even shorter timeframe - an hour (H1).
Figure 6 shows EUR/USD exchange rate quotes (H1, end date June 23, 2018).
In Figure 6, we observe the interaction of the "fast" and "slow" speakers mapped by the "fast" and "slow" layers of the RAIQS system.
Displaying dynamics (Figure 6) on a shorter timeframe (H1) (in relation to the main timeframe (D1), Figure 5) is used to identify a shorter-term trend, to improve the moments of entry and exit from the trade.
That is, in this case, the dynamics on the timeframe H1 (Figure 6) will determine the local entry into the transaction at the formation of the expected signal for a "pullback down. This signal we expect by the oscillators of the fast layer on the dynamics on the main timeframe D1 (Figure 5).
Figure 7 combines all graphical results in one window.
Forward Test
Figure 8 shows the repetition of Figure 7, but the charts of quotations now ends with the later date of July 14, 2018. That is, Figure 8 shows the repetition of the charts of Figure 7 with a time lag of three weeks. This makes it possible to consider the development of the main trends of the charts from the current date (June 23, 2018) to a later date (July 14, 2018).
Completion
The MTF (Multiple Timeframe Analysis) technique is an effective way to collect and organize data to make decisions about a traded asset. The top-down approach when implementing the "follow the market" strategy using multiple timeframes provides a more objective analysis of the dynamics of quotations and improves the quality of trading decisions.
Read the latest Fortrader magazine updates on our Facebook channel and in Telegram feed!