What Is Multi Time-Frame Analysis?

*Bob Iaccino, Chief Market Strategist and Co-Founder of Path Trading Partners, joins us live every Thursday from 11am ET, as our risk management educator. With 30 years' experience working as an active investor in equities, commodities, futures and FX there are few better to talk on the subject of risk management.

Bob has developed a method for breaking down his key fundamentals of risk management, in a way that he thinks retail traders can understand and use to get actionable insights to bring into their own trading. Below are some excerpts of Bob’s thoughts from a recent live session. If you’d like to save your seat to watch and participate in the next session, register here.

You’ll hear people talk about market internals or market tone, it all relates to the same thing. Is the asset or security you’re trading in a long-term bullish or bearish mode? Multi time-frame analysis is very important because it tells you the general theme of the asset you're looking at. Is the general theme of the asset you're looking at up or down?

Personally, I look at a weekly and then I go down to a daily and sometimes a four-hour chart. I use something called the rule of two and the rule of six.

When you're looking at long-term time-frames, you want to multiply by two or use six.

If you're looking at a one-minute chart, to multiply that by six, you're talking about a six-minute chart. I don't want traders to look at a six minute chart. What's the closest common chart to a six-minute chart? It's five minute, so your higher time frame is going to be the five-minute.

In the rule of two or the rule of six, you look at the five minute. What's the next times two or times six? Times six is thirty. So, you can go up to a thirty-minute chart or you do the two and you go up to a ten-minute chart and that's your next time-frame higher.

If I were going to suggest to traders, time-frames that go really well together, I would go hourly: thirty-minute, fifteen minute and five minute. Why? Because, those are very common charts and the more common a chart is, then the more the mob mentality - what we call the mob rule of the markets, will take over.

When you're talking about multi time-frames, the more data, the stronger what you're seeing on the chart is okay because it has more data.

Candlesticks provide you with four pieces of information - the open, the high, the low, and the close. The close is the most important one of those four. Why is that? Pick a time frame, let's say sixty minutes, because over sixty minutes of trading back and forth, the market decided that that closing price was correct. That's the correct price to close the period at.

That means all the back and forth you see in a sixty-minute chart, that the close is the correct price after all that fighting.

What works better, a sixty minute or a four-hour chart? One closing price is sixty minutes of data. A four-hour chart is four hours of data, and a daily chart is all day long. More data, better data, better outcomes.

To identify a rotation zone, you put an eight period exponential moving average on your chart and you put a twenty-one period exponential moving average on your chart. These are periods, not days.

They transmit from the thirty minute to the daily. In other words, a thirty minute has a thirty-minute exponential moving average. A daily has a daily exponential moving average. They correspond to the period of time you're looking at on your chart. That's the rotation zone.

What we do with the rotation zone is, when there is a cross on a chart and you see the rotation zone angling in the direction of the cross and widening apart, that's now a rotation zone. The rotation zone is exactly what it describes, an area where the market will rotate.

There is a high probability of going into that area and rotating in the opposite direction.

That's why we call it a rotation zone.

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