Single Vs Multiple timeframe analysis in trading: A beginner's guide

 For the last two decades, I have been very fond of photography, and one important lesson that I learned about photography is- no single lens can capture the world perfectly. A wide angle lens gives you a perfectly focused landscape in one frame, while a macro lens enables you to capture the tiny details not visible to the naked eye.

Technical analysis works similarly. Each timeframe in a chart is like a lens that enables you to get different perspectives of a stock price movement. A higher frame is your wide angle lens that lets you see the overall market trend. An intermediate timeframe is like a zoom lens that lets you notice the price patterns forming, and a smaller timeframe is like a macro lens that lets you see the precise details that help in getting entries and exits in a trade.

There has been a debate between single time frame analysis and multiple timeframe analysis among the traders for long. While proponents of single timeframe analysis talk about simplicity and ease of use, the followers of multi timeframe analysis swear by the precise entries and exits.

In the paragraphs that follows we will explore both approaches, their pros and cons and how to use multiple timeframe analysis without getting overwhelmed.

Let's get started.

What is Single timeframe analysis?

Single timeframe analysis is what it sounds like- making trading decisions by looking at only one chart interval. For example, a day trader might make his trading decisions by looking at only 15 min charts, or a swing trader only looking at daily or 4 hourly chart to make his trading decisions.

Single timeframe analysis is straightforward as you only need to understand one chart, one set of signals, and one type of price action. Many beginners prefer this analysis for its simplicity and ease of use.

What is Multiple timeframe analysis?

Multiple timeframe analysis involves looking at two or more chart intervals together before making a trading decision. For example, a trader looking at weekly charts to identify long-term trends and then check daily charts to find setups and finally an hourly chart to enter or exit a trade, is essentially doing a multiple timeframe analysis.

This method gives a zoomed-in and zoomed-out perspective of the market. The traders who use it believe that this method enables them to get precise entries and exits, and lesser failure rates.

Now that you have a preliminary idea about single and multiple timeframe analysis. Let's understand the pros and cons of these analyses.

Pros and Cons of Single timeframe analysis

Pros

• Simple and easy to follow- trading using single timeframe chart is easier as you don't have to switch between different intervals.The signals and patterns, thus are easier to interpret.
• Faster decisions- Single timeframe analysis enables you to make faster decisions.This is helpful for scalpers and day traders where speed matters.
• Less overwhelming- Too many charts might confuse some traders, especially beginners.This becomes more pronounced when charts give contradicting signals on different timeframes.

Cons

• Misses the bigger picture. A single timeframe analysis doesn't give insights into the broader picture. For example, a pullback on a weekly timeframe might look like a downtrend in daily chart.
• Increased chance of false signals- One chart alone doesn't provide the holistic view of price movements.
• Mistimed trades- Without confirmation from other timeframes, traders might mistime the trades- too early or too late entry and exits.

Pros and cons of multiple timeframe analysis-

Pros

• Aligns with bigger trends- Multiple timeframe analysis aids in aligning the trends with the larger trends, which increases the chance of a successful trade.
• Reduces false signals- Similar signals across the timeframes confirm a signal and reduces the probability of false signals.
• Better entries and exits-Multiple timeframe analysis enables traders to get precise entries with smaller stop-loss thus mitigating some risks involved with trading.
• Flexible for all styles- Works for traders with different trading styles like swing traders, day traders and even investors.

Cons 

• Complex- Working on different time frames can be perplexing at times.
• Conflicting signals- Beginners might get confused by conflicting signals across different timeframes.
• Analysis paralysis- Too many charts can freeze decision making.