My Theory to Multiple Timeframe Analysis

I have been developing my own theory to multiple timeframe analysis (MTA). MTA is almost the equivalent of a buzzword that every trading Youtuber "guru" likes to mention. However, I feel few get it right.
There are some trading videos out there that talk about performing MTA in a manner that I do not necessarily see making sense. One of them is in Tori Trades' recent video (link here). In this video, she starts drawing trend lines on the 1-month chart despite mostly trading from the 4-hour timeframe.

Perhaps she does this as part of her actual day-to-day trading routine. Or perhaps it is simply because it makes good content as a trading educator. 

If we were to use an extreme example, does it make sense to analyze the price action structure on a 1-month chart when you are a scalper trading exclusively on the 5-minute chart? No, the support and resistance levels that you have plotted on the 1-month chart will violate numerous times over on the 5-minute timeframe.

This post talks about my theory to MTA, and I hope to break it down into a logical manner. I will use my own trend-following strategy as an example.

Step 1: Plot Indicators on Chart
  • 60-period exponential moving average (EMA60) with a vibrant color as the primary signal line
  • 30-period exponential moving average (EMA30) with a slightly less vibrant color as a secondary line
  • 15-period exponential moving average (EMA15) with much less vibrant color as a tertiary line
The three EMAs will work together to identify explosive trend momentum opportunities when price moves away from the "squeezed" EMAs.

Step 2: Establish Timeframes to Perform Analysis and Trade

This step involves defining your Structural Timeframe and your Signal Timeframe.
  • Structural Timeframe: used to scan currency pairs for trends, which is defined by clear patterns of price trending above or below the EMA60 (with the trend strength by how cleanly price bounces off EMA60 and how cleanly EMA15 and EMA30 cross each other)
  • Signal Timeframe: used to optimize your trade entries and exits
The Structural Timeframe is set based on how frequently you're capable of performing scans while the Signal Timeframe defines your holding duration.

If your Structural Timeframe is the 4-hour chart, then this means you should be performing a market scan every four hours to see if there is a change in structure based on how the bar closed.

The Signal Timeframe is lower than the Structural Timeframe, which can be the 1-hour chart. If I detect a consolidation on the Structural Timeframe, this is an indication that I should go to the 1-hour chart to plan my entry. 

This also means that I should be monitoring the 1-hour chart to determine when to exit my trade.

Step 2: Special Notes
  • The Structural and Signal Timeframes should not be too far apart - if you perform structural scans on the 1-day chart but plan your entries on the 5-minute chart, there is very little confluence strength
  • The Structural and Signal Timeframes should always reference the daily chart for confluence - if the daily chart shows that price is in an uptrend, then be cautious with shorting even when the Structural Timeframe is showing downtrend potential
Step 3: Identifying Signals
  • If price is above EMA60, this is classified as a technical uptrend (and technical downtrend if price is below EMA60)
  • The strength and cleanliness of the trend is determined by how EMA15 and EMA30 behave around price and EMA60
Example:

In this example, my Structural Timeframe will be the 4-hour chart and my Signal Timeframe will be the 1-hour chart.

AUDUSD 4-Hour

On the 4-hour chart, I spotted a clean trend on the AUDUSD currency pair. You can tell that price is making lower lows and lower highs. For the majority of the time, price is also trading below EMA60.

I also plotted two teal rectangular boxes that mark EMA squeezes (price returning to the average). When I see price squeezed up against all of my EMAs, this is an indication that I need to monitor the currency pair and use my Signal Timeframe to plan my entry.

AUDUSD 1-Hour

When I go to the 1-hour chart, my sell stops are placed just below the ascending trend line (ATL). Once price crosses below each respective ATL, this is an indication that the counter-trend move is over and we have downtrend confluence with the higher timeframe.

AUDUSD Daily

Finally, we check the daily timeframe to make sure that the H1 and H4 have confluence and agreement in terms of trend direction.

Since the daily timeframe is showing a technical downtrend (price is below EMA60), we have confluence.

This example breaks down my approach to MTA. Each timeframe that you look at should have a specific purpose. You should not be starting on the monthly chart for the sake of taking a top-down MTA approach if you don't understand the why.