Line up a higher-timeframe trend with a lower-timeframe entry

The same pair can be rising on the daily chart and falling on the 15-minute chart at the same moment, and both readings are correct. Multi-timeframe analysis decides which chart sets your direction and which one times your entry. You will pull lessons 1 to 7 into one routine, ready for the Risk management course that follows.

What you will learn

• How to run top-down analysis in three steps: direction, setup and trigger
• How to choose a set of timeframes that fits how long you hold trades
• What to do when two timeframes disagree
• How the timeframe you enter on changes your stop, your position size and your daily risk

Top-down analysis in three steps

Top-down analysis means reading the highest timeframe first and working down. Each chart answers one question.

1. The higher timeframe answers "which way?". Read the trend from trends and trendlines and mark the major levels and zones. If the trend is up, you only look for buys.
2. The middle timeframe answers "where?". Wait for price to pull back to a level, a demand zone or a fair value gap in line with the higher trend.
3. The lower timeframe answers "when?". Inside that area, wait for a trigger: a candlestick pattern, a break of the small down-swing that formed the pullback, or a hidden divergence.

You spend most of your time on the higher two charts and only open the lower one once price reaches your area.

Choose your timeframes

As a rule of thumb, each timeframe should be about three to six times the one below it. Closer than that and the charts show the same thing, while wider gaps leave holes in the picture.

• Weekly, daily and 4-hour suit swing trades held for days or weeks.
• Daily, 4-hour and 1-hour suit trades held for a day to a few days.
• 4-hour, 1-hour and 15-minute suit trades held for several hours.
• 1-hour, 15-minute and 5-minute suit trades opened and closed within the day.

Choose by how long you want to hold, then keep the same set every time. On CMC Funded, holding positions overnight and over the weekend is allowed, and holding costs apply. Trading costs are charged per trade, so on lower timeframes, where targets are smaller, they take a bigger share of each target.

Decide your set before you open a chart. If you flick down through lower timeframes until something looks like an entry, you will find one on most days, whether or not the higher chart supports it.

A worked example from daily to 1-hour

Here is the routine on EUR/USD, using the daily, 4-hour and 1-hour charts.

1. On the daily chart, price is making higher highs and higher lows above a rising 50 EMA. The last high is 1.0960 and the last higher low is 1.0750. Direction: buys only.
2. On the 4-hour chart, price is pulling back from 1.0960. There is a demand zone at 1.0840 to 1.0855, and it lines up with old resistance that has turned into support. That is your area.
3. On the 1-hour chart, price dips to 1.0844 inside the zone, then a bullish engulfing candle closes at 1.0868. That is your trigger.
4. You enter at 1.0868 with a stop at 1.0828, 12 pips under the zone. That is 40 pips of risk.
5. Your target is the daily high at 1.0960, which is 92 pips away, or 2.3 times the risk.

How the entry timeframe changes your size

Suppose you risk 1% of a $10,000 account, which is $100, on every trade. A standard lot of EUR/USD moves $10 a pip.

• With the 1-hour entry above, the stop is 40 pips away, so $100 ÷ 40 is $2.50 a pip, or 0.25 lots.
• Had you bought from the daily chart alone, the stop belongs under the daily higher low at 1.0750, 118 pips away. $100 ÷ 118 is about $0.85 a pip, so 0.08 lots, which risks $94.40.

The dollar risk and the idea are the same. The lower-timeframe entry carries about three times the position size, and the same target pays 2.3 times the risk instead of 0.8 times. In exchange, a tight stop gets hit more often by ordinary noise.

Daily risk adds up fast on lower timeframes, because you take more trades. On a $10K Classic account the daily loss limit is $500, measured on equity, so open positions count against it. At $100 a trade, five losses in one day would use all of it before trading costs, and reaching the limit ends the account. The position sizing lesson and the daily loss and maximum loss lesson take this further.

When the timeframes disagree

The higher timeframe wins on direction. If the daily chart is rising and the 4-hour is falling, the 4-hour move is a pullback in daily terms. Wait for it to reach your area and turn, or stay out.

If the higher timeframe is ranging, you have two choices: trade from the edges of the range with smaller targets, or wait for a breakout to set a new direction. Avoid buying in the middle of a range because a 5-minute chart looks strong.

Check your understanding

You trade the 4-hour, 1-hour and 15-minute set. Which chart sets your direction?

The 4-hour. The 1-hour finds the area, and the 15-minute times the entry.

The daily trend is down, and the 1-hour shows a strong rally. Do you buy the rally?

No. In daily terms the rally is a pullback. Wait for it to reach a supply zone or resistance and look for a sell trigger there, or do nothing.

You risk $100 with a 25-pip stop on EUR/USD. What size do you trade?

$100 ÷ 25 pips is $4 a pip. At $10 a pip for a standard lot, that is 0.40 lots.

Key points

• Read the higher timeframe first: it decides direction, the middle one finds the area and the smaller one times the entry.
• Keep each timeframe about three to six times the next, and use the same set every time.
• When charts disagree, the higher timeframe's trend wins.
• A lower-timeframe entry gives a tighter stop and a larger size for the same dollar risk, and more trades that count against your daily loss limit.

Next: take the course quiz, then start the Risk management course with how a challenge works.

All trading is simulated. Rewards are based on performance and are not guaranteed.