Timeframe analysis

This article will present how a trader should select the timeframe he is willing to forecast the market moves on, and what indicators settings apply to a specific timeframe.

“What’s your forecast on EURUSD ?”. “Hum…EURUSD will probably go up.”

Go up when ? How ? Up to which level ?

To have a good answer one should know how to ask a question correctly. If you don’t set a timeframe in your question, or in your answer, your opinion is worth nothing.

 
“What’s your forecast on EURUSD for the next 3 days?”. That’s a good question.
 
There is a huge majority of analysts providing forecasts covering a non defined period of time, some of them dare to speak about long or short term, but in term of days, or weeks, you may never find anyone mentioning that in your trading life.
 
Literature on technical analysis, with in particular Dow, give precision on what the Long, Medium and Short term periods are.
 
Medium term analysis, which I will equate here to “weekly analysis” must be done on a period of 6 months. In other terms if you wish to conduct a technical analysis for a weekly forecast you should calibrate your chart to display only 6 months of data on a weekly chart (1 candle = 1 week). Data before these 6 months is irrelevant for a weekly analysis.
 
Below a daily chart set for a period of six month in order to conduct your (trend) analysis, as you can see the period is spanning from August the 3rd to January 7, which is about 6 months:
 
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In the same way for a Short term analysis one should display only 4 weeks of data on a daily chart and for an intraday analysis only 3 days on an hourly chart. When I say 3 days, it’s the current day plus the two last days.
  
These timeframe delimitations are especially important when it comes to assessing the trend. The knowledge provided in the section “Trends & trendlines” is to be used only after displaying the correct timeframe on the chart, otherwise the trend assessment would yield random results.
 
Both charts below should be read after the red vertical line, after which the correct period is displayed for our analysis.

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The weekly chart features a clear uptrend. The daily chart shows a clear downtrend which started after the break of the low of November 20th.

It takes more than a few seconds to assess the trend of the intraday chart (last chart), which indicates that the intraday trend is not well defined. Here we have an uptrend which may reverse to a downtrend should the move continue lower than the LOW on Jan 6 at 15:00. If you look closely at the article entitled "trends & trendlines" you will be able to match the displayed patterns to all these charts.

There are specific indicators to use for every timeframe, and some indicators which apply to several timeframes must be calibrated differently should you be looking for a medium, short or intraday analysis. Moreover knowing what timeframe we are looking at is vital when it comes to tracing supports and resistances.

Without going too deep into the details, I am listing here below for every timeframe the most suitable indicators to use:

For the long timeframe the following indicators are used:
Ø The Dow Pattern (or assessing the current trend on the selected timeframe)
Ø The Standard Error Channel
Ø The Moving averages (MA)
Ø The Moving Averages Convergence Divergence (MACD)
Ø The Rate of Change (ROC)
 
For the Medium Timeframe the following indicators are used:
Ø The ROC compared to the Moving Average
Ø The MACD compared to the Moving Average
Ø The Relative Strengh Index (RSI) compared to the Moving Average
Ø The Intrading momentum Index (IMI) compared to the MA
 
For the Short timeframe the following indicators are used:
Ø The RSI vs MA
Ø The Histogramme MACD
Ø The Stochastic oscillator
Ø The Bars chart
Ø The Candles chart
Ø The Bollinger Bands

Practically, if you are willing to trade intraday, you should apply the short timeframe indicators to the hourly charts (by calibrating your chart to display only 3 days in this case), the Medium timeframe indicators for the daily chart, and the Long timeframe indicators for the weekly chart.

As said earlier on you may very well be on an uptrend on a weekly chart while on a downtrend on the hourly. Analysis on each specific timeframe will give you the general direction of the trend as follows:

  • An hourly analysis will give you the trend for the next 3 days including current day
  • A daily analysis will give you the trend for the next 4 weeks including current week
  • A weekly analysis will give you the trend for the next 3 months including current month

Of course the analysis is not totally accurate, but such analysis being based on a limited amount of indicators (although the most relevant ones) require less than an hour and yield generally good results.

How to interpret every indicator, and how every indicator should be set according to the timeframe it is being used on is explained in the section entitled "interpreting indicators".

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