Binary options are typically traded within a short period of time, as such the concept of multiple time frames does not seem too relevant when trading options. But, most traders actually apply multiple time frame trade analysis (MTA) more often than they realize.
What Is Multiple Time frames Analysis (MTA) For Binary Options?
MTA is a form of technical analysis used to determine when to enter or exit the market. If, from the chart analysis, you receive a signal that corresponds to the time-frame of the underlying asset, this could set you on your way to profitable trades.
How does Multiple Time frames Analysis (MTA) work?
First, why does a binary trader need to apply multiple trade analysis when they can just use a single time-frame? Monitoring the price movement of an asset across different time-frames gives you adequate data before executing a trade.
Ideally, traders should apply three time-frames to accurately analyze the price movement of an asset. These time-frames are short-term, medium-term and long-term.
To apply the MTA method, you need to first determine your medium time-frame, which is indicative of the period of time you usually hold on to your trades. For example, if you usually hold on to your trades for 8 hours, that would be your medium time frame.
Next, determine your short-term and long-term time-frames. Most traders use 90 minutes for the short term and 24 hours for the long term.
It is possible to analyze multiple time frames on one chart. In fact, you can adjust a single indicator to measure more than one time frame or an indicator that already incorporates multiple time frames. One of the best indicator that you can use in order to do this is the Elliot Waves.
Monitoring the long-term time frame allows you to see the general trend of the asset movement. As you start to track the medium time-frame, you will notice fluctuations in the general trend.
Lastly, look at the short term time frame to conclude your trade. Monitoring the short term time frames allows you to see subtle price movements so you can determine the best point at which to enter the market.
The rule of thumb is to only enter the market when the medium and short term price movements are moving in the same direction as the general trend as defined by the long time frame.
Example: for 60 second binary options, traders may be to periodically look at the 5 minute and hourly timeframes in order to avoid key areas of support and resistance which may not be visible on the 1 minute charts. Basically the wider out you go, the more visible the support and resistance levels become, thus giving you more valuable information.
Multiple time frame analysis therefore helps to align your trades with movements in the market. It gives you edge and ensure you do not trade with trend against larger timeframe. It is generally accepted by traders not to trade against large timeframe trend.