By Admiral Markets
Dear traders,
The term MTF stands for Multiple Time Frame Trading. MTF trading is a process of looking into different time frames and aligning both trend, momentum, and direction.
Inherently, Forex trading tends to have shorter time frame than securities, bonds, or other markets. Momentum push can be huge for some Forex pairs. This is more exaggerated due to the use of leverage. The leverage in Forex trading is commonly used, and it spikes up borrowing costs, pushing traders towards using shorter time frame strategies.
I frequently use the (in)famous saying
the trend is your friend, and I believe it. While the underlying intent is to emphasise trading with the trend only for it to be your friend, it will really come down to your ability to time entries in the market, especially because it is needed for the time frame you wish to trade on. In order for the MTF approach to be successful, we need to align:
What we need to do is piggyback the momentum from higher time frames into a lower time frame. For this to work, especially for gauging trend and momentum, we might need to use the MACD indicator, and I will explain how.
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The MACD stands for Moving Average Convergence Divergence. It is a trend-following, trend-capturing momentum indicator that shows the relationship between two moving averages of prices. The MACD was created by Gerald Appeal in the late 1970s. The MACD indicator formula is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called signal line, is then plotted on top of the MACD, usually marking triggers for buy and sell signals.
Another version of the MACD is the so-called 2 Line MACD, which can also be combined with great trading strategies. The difference is that the default MT4 MACD indicator lacks the fast signal line (instead of showing the fast signal line, it gives you its histogram).
For trading, it’s completely irrelevant as long as you use it with other tools that work in conjunction with the MACD itself. When the red and blue MAs cross on the 2 Line MACD, it is equivalent to the red MA line crossing the green histogram on the default MT4 MACD. There is no lag time with respect to crosses between both indicators, they are timed identically.
Trend is a series of Higher Highs and Higher Lows (uptrend), or a series of thrust and pullback. Very occasionally, the trend can be shadowed by the so-called whipsaws. In that case, the trend is not seen clearly. Because of that, I have been using my own developed MACD indicator that shows trend in the following way:
Monthly, Weekly, Daily
The histogram is thick blue for uptrend or thick red for downtrend.
Source: ecs.MACD Indicator
The histogram is thick blue, and the blue MACD line is ABOVE the 0 line for uptrend. For downtrend, the histogram is thick red and the blue MACD line is BELOW the 0 line.
Source: ecs.MACD Indicator
Source: ecs.MACD Indicator
When determining the trend on a specific time frame, we need to move one time frame lower for finding the momentum. In order to align trend and momentum, we need to have an opposite move from the trend.
To find an entry, we must first wait for a retracement ( the buy-low-sell-high principle). The retracement on the MACD is indicated by a thinning histogram.
For example, if we have an uptrend on a daily time frame indicated by a thick blue histogram, then 4h should have a thinning histogram. That indicates a 4h retracement.
Source: ecs.MACD Indicator
By aligning a daily trend with a 4h momentum, we can then move on to lower time frames and search for an entry.
For entries, some traders would use a momentum time frame, whereas others might want to drill down to a lower time frame and search for an entry. In the case of the Daily trend, H4 retracement, the entry time frame is usually H1, M30, or M15. Traders might want to use different
price action tools, confluence, candlesticks, or whatever method they see fit for an entry.
Entry time frame is important as this is when and where entries are made. Effectively, the entry time frame is using higher time frames momentum and trend for a decision.
As the ecs.MACD uses a modified OSMA indicator, traders might want to use the MACD 2 Line indicator as a replacement that can be easily found on the Internet for free. I personally sent the indicator to a considerable amount of traders who requested it on my webinars.
Source: MACD 2 Line Indicator
One of the first books I read in regards to the famous MACD indicator was William Blau’s
Momentum, Direction and Divergence that helped me embrace a lot of principles and incorporate them into the MTF and MACD analysis. Of course, a lot of screening time and effort has been put into the research as well.
MTF trading can be a great asset, whereas riding the momentum and trend from higher time frames can prove very fruitful when mastered. Come and join
our webinars to see how I trade the price using the MTF approach!
Cheers and safe trading,
Nenad
Article by Admiral Markets
Source: Aligning Trend Momentum and Direction: MTF Trading
Admiral Markets is a leading online provider, offering trading with Forex and CFDs on stocks, indices, precious metals and energy.