I use multiple time frame analysis in my forex trading for the sole reason that I think it give me more of an edge than if I were to use only one time frame. Let me give you an example.
Back in January, the USD/CAD 1-hour chart showed a short-term uptrend. (Click thumbnail for larger image)
Thinking about going long? First, if you were following the longer-term trend of the USD/CAD, you would have seen that the pair was in a strong downtrend for a year. This might be one caution flag to warn you to only look for short trades. But what if you're weren't too concerned about the long-term and wanted to look for a quick long trade that lasted under two days? Using a combination of trendlines or other indicators, if you used multiple time frame analysis before going long, you might think twice.
Here is a daily chart of the USD/CAD showing the same time period as the hourly chart above. (Click thumbnail for larger image)
The red line is the 200-day simple moving average. Considering the downtrend the USD/CAD had been in for the last year and the position of the price in respect to the 200-day SMA, would you still think about going long here. If you were to go long, you'd be doing so right where the price was hitting major resistance on the daily chart. Of course this analysis all depends on the indicators you use. Personally, I use the 200 SMA so I would not have gone long.
The outcome is that the price bounces off the 200 SMA and heads down quickly.
This is all looking in hindsight but I hope it shows my point.
If you're interested, there is a new article on Investopedia that goes into a little more depth about using multiple time frames in FX.
To read more about other forex related topics, go to http://www.forexproject.com.
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