This blog is dedicated to educating forex traders about parallel and inverse analysis, which almost all forex traders do not understand or use. If you study this blog carefully the amount of pips you make could increase substantially.
We use parallel and inverse analysis every day at www.forexearlywarning.com when we analyze the spot forex and also when making trade entry decisions using the The Forex Heatmap®.
Multiple time frame analysis of the spot forex is by
far the most thorough method of analyzing a currency pair. It takes time and
effort and this goes against what most forex traders want which is something
quick and easy. Most forex traders generally look at only one time frame. For
those of you who want to truly understand how the forex works its imperative to
be thorough when analyzing a currency pair and the overall market prior to
entering a trade and risking your money.
Multiple time frame analysis (MTFA) of the spot forex is completely
misunderstood and most forex traders are scared to try to learn it. MTFA is
also completely underutilized because it takes more work and most forex traders
are looking for shortcuts like forex robots or trading off of one time frame. A
handful of forex traders have mastered MTFA and the number of people who
utilize it is slowly growing due to the historical lack of success of forex
traders and the dangers of trading on only one time frame.
is Multiple Time Frame Analysis?
Multiple time frame analysis (MTFA)
is the inspection of very basic forex trend indicators and forex charts,
starting with the largest trends and time frames, and working backwards down
through successively smaller time frames to see how the smaller time frames and
trends feed the larger time frames. When the smaller time frames are in agreement
with the larger trends you can enter a spot forex trade in the direction of the
trend with very good safety. If no trend exists on a particular currency pair
the smaller time frames and trends will, at some point, build an uptrend or
downtrend. MTFA is completely logical.
The principles of multiple time frame
analysis are also fairly simple and if used daily will help you to learn forex
trading and have a complete grasp of the forex market. When using multiple
time frame analysis the smaller trends are used to enter the larger trends, if a
trend is available, or to observe how the larger trends are built from
the smaller time frames. If a larger trend is currently established on a
particular currency pair you would enter the trade when the smaller trends and
time frames are in agreement with the larger trends, The smaller time frames
confirm the continuation of the established trend.
MTFA has been around for nearly 30
years. The MTFA method is applicable to stock and commodities trading, equity
options and currency options, and now forex trading. The method is applicable
to any currency pair. We are respectful of the strong technical work of Kathy
Lien and Brian Shannon outlining MTFA principles and links to their their
technical papers are available at the bottom of this article
of Multiple Time Frame Analysis
Multiple time frame analysis is
conducted as follows. You take a set of simple trend indicators and forex
charts and install them on a forex charting platform. Then start with the
largest time frame available on the charting platform and “drill down” the
charts to the smaller time frames in descending order on one currency pair.
In order to conduct and accomplish a
multiple time frame analysis on the spot forex you need the proper forex
charting platform and a set of trend analysis tools and indicators to
facilitate the process. Some forex charting tools and platforms are very
expensive but many are free. This is discussed in detail below.
How many time frames must be examined on each currency pair??
Based on experience about 8-10 time frames is enough but about 10-15 is much
better. You can drill down the charts on the top 15-20 traded currency pairs to
seek out the best opportunity.
What is the correct number of time frames that must be in agreement to enter a
trade?? Based on experience about 3 time frames is enough if you know the
direction of the primary trend on the larger time frames.
The first step when conducting a MTFA on a currency
pair is to inspect the largest two or three time frames and trends on one
currency pair or several pairs you may be interested in trading. See what
currency pairs have established larger trends, then see whether the trending
pairs are at the beginning, middle or deep into the trend.
Also determine which pairs are not trending on the larger time frames, any
currency pair that is not trending is likely oscillating or ranging up
and down between support and resistance. These pairs could be developing a new
directional trend at some point or within a few days.
to Observe When Drilling Down The Charts
Every time frame has its own
structure and is independent of the other time frames. The higher time frames
trends and the direction of the major trend always overrule the lower time
frames. The prices in the lower time frames tend to respect the energy points
(support and resistance points) of the higher time frame structure. The support
and resistance areas in the higher time frame can be validated by the action of
lower time periods.
One time frame may appear to be
chaotic and have its own structure, then the next time frame appears to be
smoother cycles and much easier to trade, in this case you would trade the
smooth time frame because this is what defines the market condition right now
and is easy to read. New trends in the smaller time frames enable us to enter
the trends in the larger time frames if a currency pair is trending. MTFA will
also quickly determine if a currency pair is not trending on the larger
time frames and then verify if the pair is oscillating or ranging between
support and resistance on the smaller ones. If a currency pair is not trending,
oscillating, or somewhat chaotic at some point the pair will start to trend and
the trend will always start on the smaller time frames on the left as the pair
breaks out of its range.
The “drilling down the charts”
process enables us to identify the smaller trends which feed the larger trends.
It will always let us know whether or not a larger trend is starting or is
already established. If a currency pair is deep into its trend or movement,
MTFA still works but the risk/reward profile of a new entry changes because the
trend may be nearing the end of this move. But once again MTFA will keep you
informed of this. Trading off of one time frame will never give you any of this
If a currency pair is in an uptrend
on the larger time frames and sells off against the uptrend you can use the
smaller time frames to detect this and then subsequently re-enter the larger
uptrend. This form of trend trading is one of the safest methods available of
trading the forex. The currency pair sells off against the primary trend
establishes a relative low and then reverses back up into the trend. This can
also be done when a currency pair moves up against a larger downtrend. Multiple
time frame analysis facilitates this but looking at one time frame the trader
would be totally ignorant of this low risk trading opportunity.
To summarize MTFA, you navigate to
your charting platform and start with largest time frame and "drill down
the charts" looking for the trends, oscillations and ranges, choppiness,
orderly and smooth movements and chaotic movements and you observe them. You
are looking for smooth time frames and trading cycles that are easier to
identify visually. If you believe that the market is choppy this should be
noted because you will have a higher probability of stop outs on entries into
these choppy markets especially if your stops are pretty tight.
Remember smaller time frames feed the
larger time frames. The smaller time frames can be observed in a non trending
market as larger trends are slowly built day by day. If the larger
time frames are not trending the smaller time frames are most likely ranging or
oscillating. If the larger time frames indicate a trend you will know if you are
early or late in the trend cycle. MTFA completely strips down a currency pair
so you have deep knowledge of its behavior.
Most forex trading platforms and
forex charting systems are not properly designed for MTFA and have a fixed
number of time frames that you can work with. Most or all forex charting systems
are set up with totally arbitrary time frames with no logic path whatsoever and
are totally deficient for MTFA. The reason for this is that the forex
industry and the majority of forex traders have not accepted multiple time frame
analysis. Therefore the analysis tools that we are provided with reflect this
ignorance and these analysis tools are mostly deficient. So for now we are
stuck with these forex charting systems so lets review them now and make the
best of what the forex industry and software companies have given us.
Here are two forex charting platforms and their associated time frames. The top
charting platform with the arrows is expensive and has 7 different time frames.
The 7 time frames are interchangeable so you can add additional groups of 7 more
preset time frames so that analysis of 14 or 21 time frames is possible quickly.
The tool allows for quick navigation through the time frames by simply clicking on the red and green lights but cost is a
limitation on this charting package.
Here is the forex trading software
and forex charts platform known as Metatrader. Metatrader has 9 fixed
arbitrary time frames but the time frames are not customizable. This platform is
"adequate" for multiple time frame analysis but about 5 or 6 more
time frames would be much more than adequate, especially if the time frames were
adjustable and not arbitrary. The limitation on this charting package is the
number of fixed time frames but cost is not a limitation, it is free via most
forex brokers if you open a live or demo forex trading account. Metatrader
platforms also include desktop price alarms that are built in, another added
plus. The time frames are highlighted in blue.
chart portion of this image is an example of what one chart
on one time frame looks like on Metatrader. This example is an M15 time
M15 chart, which is 15 minutes per green vertical bar. The red and green
are a very simple set of trend indicators and the instructions for
these trend indicators across all 9 time frames is listed at the bottom
of this article with all of the other links. You can use off the shelf
trend indicators to
conduct multiple time frame analysis. Simple indicators like these
moving averages are fine. Just apply them across multiple time frames
is what they will look like. You will learn to trade the forex and
trading substantially with MTFA.
There are other charting platforms available to forex traders and some high end
platforms available from forex brokers that have adjustable time frames. These
moving averages and simple trend indicators can be set up on these high end
platforms provided by some brokers. We applaud the forex industry and some
forex brokers in this area as providing access to better charting systems
facilitates more forex traders using MTFA which can only benefit all forex
Additional Thoughts on MTFA
Is it possible to make multiple time frame analysis better??
I believe the answer is yes. Incorporating parallel and inverse analysis into
the analysis as well as support and resistance to set price alarms for
notification of momentum or a possible entry point can all help.
Incorporation of Parallel and Inverse Pairs
In other words if you would like
to conduct an analysis of various trends and time frames on the USD/CHF for
example, then you would conduct a MTFA of this pair but you would also need to
conduct the same MTFA across the same time frames for at least two more USD
pairs at a minimum, like the EUR/USD and GBP/USD. Then you could determine with
alot more confidence if there is consistency and agreement between the three
pairs, i.e. consistent USD strength or weakness across all three pairs.
Alternatively if there is no consistency with the USD you could also conduct a
MTFA of the GBP/CHF and EUR/CHF looking for consistent trends based on CHF
strength or weakness.
Then you would know for sure that the USD/CHF is trending, oscillating and
ranging, or choppy and you would also know why, then you have done the analysis
of the USD/CHF correctly and thoroughly. This exact analysis method can be
applied to any currency pair.
Most forex traders will not do this and most forex traders are not thorough.
Traders need to see that it is their money at stake so they had better get used
to being thorough from now on. The charts are right there start looking at them
and take pride in being thorough.
Scalpers may find MTFA to be to
their liking because they would be aware and never trade against the larger
trends and potentially hang onto trades much longer. One of the biggest reasons
people scalp is that they have no idea which direction the trend is on the pair
they want to trade. Or they only look at one time frame. Traders scalp the
foreign exchange but statistics show that people who hang on longer and ride
longer trends make the most pips. All forex traders benefit from MTFA.
Why do traders not use multiple
time frame analysis? Mostly because analyzing alot of pairs and time frames takes
time and people basically are lazy. They are looking for the next big thing in
the forex when the answer is right in front of them. Looking at one forex chart
is all they want to do. Most scalpers only look at one time frame and could
possibly be trading against a larger trend, or a scalper may be trading at the
beginning of a very large move and exit way too early. If you are near the end
of a trend you may also enter a trade after a long move and be entering near
the end of the trend. This is poor money management under any scenario.
Scalpers need MTFA but traders who would like to stay in their trades longer
and ride the trend would, by nature require knowledge of MTFA.
MTFA works, it is that simple. Pips
can be made and a more thorough analysis of any currency pair is possible and
the method is effective, especially when larger time frames and trends are
traded for larger pip totals. Money management ratios also improve when you are
entering a larger trend. By applying MTFA to multiple forex pairs in the same
parallel or inverse group of pairs your odds increase again, this is because
you can choose to trade the best and largest trend available in the spot forex
and ride the trends longer. The more pairs you analyze, the more potential pips
there are, so there is a payoff for your time and effort.
MTFA analysis of the spot forex is
here to stay. Traders worldwide are starting to accept and learning to
understand the multiple time frame analysis method and abandoning trading on one
time frame due to the additional entry risk and past monetary losses. MTFA is a
rigorous method or analyzing the forex. But it is not difficult to learn. When
combined with parallel and inverse analysis is quite powerful and can lead to
high probability trading plans and trade entries. It can be applied to any
currency pair using simple, free trend indicators and analysis tools available
on the internet from many spot forex brokers. Instructions on how to set up
these simple forex trend indicators are at the bottom of this article.
the Analysis is Finished What Will I Know ?
After a forex trader has completed
analyzing the market with MTFA he or she will know if the currency pairs
examined are trending, oscillating or ranging, or have smooth or choppy trading
cycles. The trader will also know if the behavior of the pair has adequate pip
potential to consider a trade or putting together a trading plan.
If you follow the rigorous rules in
this article for conducting MTFA you will also know which parallel or inverse
pairs in the same individual currency groups are also trending, which increases
your odds tremendously of making the correct analysis and subsequent trade plan
You will not be ignorant of the
larger trends if there is one in place. MTFA should have a profound impact
on any forex trader who discovers it. Knowing if a pair is trending or not
would be an immediate criteria for a trader to trade or not trade and his or
her trading results would start to improve just by glancing at the larger
trends. The impact would be positive and immediate and you would start to develop
criteria for preparing trading plans while learning the behavior of currency
What Do I Do Now ?
Okay you have sold me. I believe in
multiple time frame analysis. I have analyzed currency pairs with MTFA, I have
found a currency pair in a nice uptrend, the parallel and inverse pairs all
verify the direction, what do I do now?? How do I enter the trend??
You are almost ready to trade. You
have identified a pair and it is trending, you need an entry plan. The pair you
are interested in general will have a nearby support and resistance point. In
this case the pair you have identified is in an uptrend so you can look for the
next resistance point. Now just go to your forex charting platform and set a
price alarm at the next resistance area to intercept the next move. When the
price alarm hits check the smaller time frames to see if they are in agreement
with the larger trends, as outlined in your MTFA setup, and if all of the
trends are in agreement enter the trade.
As a final step before entry check
this visual map of the spot forex called The Forex Heatmap ®
The Forex Heatmap®is a visual
map of the spot forex to verify all of your trade entries. The step by step
guide to using The Forex Heatmap® is included in this article in the links at
the bottom of the page. Now you can verify your entry into the trend. In this
example above you have a buy signal for the GBP/CHF.
Now you are ready to trade the spot forex, you analyzed the market thoroughly
across multiple time frames and multiple pairs. You determined the trend on a
pair, you analyzed multiple parallel and inverse pairs to verify the high
probability of the move on the pair, you have set a price alarm to intercept
the move, and you checked The Forex Heatmap® entry verification system to
verify your trade entry. You are a thorough and accurate forex trader and are
now in a position to win on every trade while other traders continue to
struggle scalping with indicators on one time frame.
The Future of MTFA
As I stated above there are some high quality charting platforms that work well
with multiple time frame analysis. There needs to be more improvements in forex
charting platforms with more time frames that fully adjustable by the end user
so you are not stuck with fixed forex industry time frames like H1, H4, etc.
which decrease the value of MTFA and handcuff forex traders somewhat. More and
more traders will demand charts like this or take their business to another
The acceptance rate of multiple
time frame analysis is slowly growing and the dangers and risks of trading from
one time frame are slowly being revealed to forex traders who will want better
trading tools. Forex traders will go with the brokers who have the best tools
and move their money elsewhere.
At this time multiple time frame
analysis is visual and must be done manually with a lot of computer keystrokes
and it does take some time. As you get better at it the process goes much
faster. In the future MTFA could be done differently and a computerized system
of MTFA using advanced forex trading software where the analysis is conducted
by a computer that models the data and conducts linear and nonlinear regression
for each time frame with least squares analysis. The program would
"optimize" a set of at least three time frames for each pair with the
lowest standard deviation or highest degree of smoothness for each of the three
time frames for that particular currency pair. The computer program would then
print out the customized time frames for the trader to set up and watch. This is
a vision of computer analysis of the spot forex that I believe will at some
point be accomplished.
Articles on Multiple Time Frame Analysis
My personal journey through multiple
time frame analysis started when I was reading stocks and commodities magazine
and came across Kathy Liens article. In order to understand the principles of
multiple time frame analysis you can consult her technical article titled
“Trading Currencies Using Multiple Time Frame's” by Kathy Lien and Patrick
I was immediately impacted by Ms.
Liens work and I knew that the red and green light software, which had only 4
lights at the time and was the charting platform I was using at the time, was a
charting package that needed to be improved upon and at that the software was
actually a tool for MTFA, and now everyone else knows this.
Nobody I worked with understood this
software and charting platform and I made it my mission to understand it and to
try to be the best at applying this platform to multiple time frame analysis.
This evolved into the “Big Lights” method of multiple time frame analysis, and I
subsequently put together a set of free trend indicators for multiple time frame
analysis on my website that were developed with assistance from others.
Also there is a link to an excellent
article on multiple time frame analysis by Mr. Bryan Shannon at the bottom of
this article. The Article is titled "Increase Your Odds With Multiple
Time Frame Analysis"
These two articles and the MTFA
method had so much of an impact on me that I wrote my own original article, as well as this one, on
multiple time frame analysis. Then I included some new information that includes a
discussion of parallel and inverse analysis which could clearly enhance the basic MTFA methods.
The forex market is a support and resistance market,
all trends start and end at support and resistance. All reversals and
retracements start at support and resistance. Forex trading becomes a lot
easier if you are an expert at identifying key areas of forex support and
Term Support and Resistance Monitoring
SHORT TERM (Intra-day) SUPPORT ON THE GBP/USD If near
term support and resistance is compared to longer term support and resistance
on these simple forex charts and forex trend indicators that we will use in
this article then our understanding of forex support and resistance will be
strong. So we need to divide forex support and resistance into short term
support and resistance and and long term support and resistance.
For analysis of the forex market we use multiple time frame analysis with simple
bar chart forex charts, and this is the same way that we analyze support and
resistance, across different time frames.
Monitoring Short Term Support and Resistance
If a currency pair is trending you can use price alarms to monitor for
breakouts of the short term support or resistance established over the last 18
hours for trade entries while the pairs are consolidating.
To monitor short term support and resistance you can set up some simple trend indicators which are available on a piece of trading software called Metatrader. These indicators that look exactly
like these charts presented in this article.
Trend indicators work a certain way and you must learn to think like trend
indicators work. There are trend indicators you can use every day like these
simple exponential moving averages that work extremely well and will help you
to learn forex. These are price related indicators but are historically
and exponentially weighted with the near term pricing support and resistance
carrying more weight. Historical data is accounted for in charts and
exponential moving averages work in a similar fashion with natural heavier
weighting of data to the right side of the chart.
Set up these forex charts on a Metatrader platform using the setup link at the
bottom of this article and check the M5 and M15 minute charts on several pairs
when the pairs are consolidating. Write down the numbers and these are the
short term support and resistance levels. You can also call this intra-day
support and resistance because these levels have been established in the last
The chart you can see above this text is an M15 chart showing intra-day support
on the GBP/USD, just set your price alarm immediately below the support
established on the right side of the chart.
Term Support and Resistance Monitoring
LONG TERM SUPPORT ON THE GBP/USD To monitor
long term support and resistance to assist with your forex trading set up the
free trend indicators. But now you need to check the support and resistance
on the longer time frames like the H4, D1 and W1 charts. Check out the longer
term support and resistance when the pairs are consolidating. Write down the
long term numbers and compare the long term numbers to the short term support
or resistance numbers. Not exactly too difficult and you will learn forex as it
relates to all of the support and resistance numbers on the various pairs on
The chart above shows long term support (W1 Chart) on the GBP/USD just below 1.5300 (yellow line on right). Very easy to spot the support levels.
Better Price Alarms
HOW TO SET UP PRICE ALARMS ON METATRADER
If you decide to set a price alarm off of short term support or resistance be
sure to check the long term support and resistance as well on the same pair. In
the GBP/USD screenshot you would set the price alarm below the intra-day support
on the right side of the chart if the GBP/USD was in a downtrend. Compare the
short term support level to the longer term support levels and see how much
room there is in between the short term support versus long term support
numbers. If the numbers are too close then set your alarm off of the long term
support numbers, its just not worth it to try to trade this pair otherwise. In
other words if the numbers are close to each other its best to set price alarms
outside the long term support or resistance so you have more pip potential if
you decide to trade it. Now you can quickly identify the pip potential of any
Sometimes the short term support or resistance numbers match up evenly with the
longer term support and resistance numbers and they may match up quite well. If
this is the case any breakouts of these prices can produce strong new up trends
On the chart of the CHF/JPY above you could set a price alarm at 76.00 for a
potential price breakout of the support level but as you can see it looks like
it has held the support nicely over a long period of time and eventually did
reverse back up and build an uptrend.
Forex price alarms are also free on
a piece of forex trading software known as Metatrader. You can set multiple
alarms on multiple pairs and always be monitoring the forex for price movement
and breakouts at no cost. A phenomenal free tool for forex traders!! Just above
this paragraph is a photograph of how to set price alarms on a Metatrader
platform on any forex pair. Monitoring currency pairs with price alarms will
help you to learn forex and always know when the market may be moving.
Spikes Versus Areas of Support and Resistance
A price spike is generally not too
important when analyzing forex support and resistance. Price spikes can happen
around forex news events that you can find on forex news calendars. Trend
indicators are more sensitive to areas of support and resistance than price
spikes, which are somewhat meaningless to trend indicators. Price spikes are
quick jumps or drops in price that quickly recover back to the same price
Support and resistance matters a lot to the trend indicators you would use to
analyze the market, because the indicators you see in this article are price
based. All trends start and end at support and resistance. Learning to identify
spikes will also help you to learn forex and their relative lack of importance
compared to clearly defined strong areas of support or resistance.
Almost all trend indicators treat spikes as insignificant compared to repeating
and continuous areas of support and resistance which are very significant.
Trend indicators which tend to smooth data like regression channels and the
ones you see in this article are more sensitive to areas of support and
resistance versus spikes.
Since most trend indicators including the exponential moving averages pictured
here all have historical weighting of price built in to their formulas and
algorithms they both "see" all of the historical price data
especially recent price data because the algorithms are historically weighted
on these indicators.
The indicators shown when the green line converges on the H4 and D1 charts this
is an indication of a currency pair stalling at longer term support and
resistance. This is why the D1 chart on these free trend indicators matches up
so well with most other trend indicators. Convergences of the green line occur
when the price stalls on the various time frames and is somewhat obvious on the
This is because as we have said over and over, that all trends start and end at
support and resistance.
Nature of Support and Resistance
THE EUR/AUD OSCILLATING IN A 300 PIP RANGE Spot forex
support and resistance numbers are repetitive on ranging or oscillating pairs,
they are also repetitive on long term support and resistance numbers over
months and years. Its clear on the charts if you have a close look
Oscillating Currency Pairs - Some currency pairs are not trending, they
are oscillating or ranging up and down between support and resistance as in the
example above. Major currency pairs and exotic pairs can do this and they do
this all of the time in a non trending forex market. Support and resistance
numbers are repetitive on ranging pairs and it is obvious.
Setting up the Metatrader forex trading software, these free trend indicators
and setting price alarms will help you to learn forex and greatly assist with
your forex trading, you will always know when the forex is moving.
STRADDLE ALARM ON THE USD/CAD
Sometimes currency pairs are moving sideways in a tight price range, in this
case you can set a straddle alarm. A straddle alarm is two price alarms on the
same pair, one is above the tight trading range, one is below the tight trading
range. Resistance alarm and support alarm set simultaneously to detect movement
in either direction.
In this case after a thorough analysis of the CAD and USD groups using multiple
time frame analysis it was unclear what direction the USD/CAD would go so a
straddle alarm was set. The reason you set two price alarms of the same pair is
that you just do not know what direction the pair will go based on your overall
assessment of the market.
In this case it hit the support alarm and a forex trading entry was verified to
sell the EUR/CAD based on CAD strength using the Forex Heatmap® which is
described below. Remember that this Metatrader forex trading software and
charting package is free, and so are the alarms and indicators. Metatrader is
available from many forex brokers.
to Do When The Price Alarms Go Off
VISUAL MAP OF THE FOREX - THE FOREX HEATMAP®
So now you know how to set up price alarms and monitor the spot forex pairs for
movement using these forex charts. You are now monitoring one or more pairs
with price alarms. The London session starts and the heaviest period of market
activity is starting including a lot of the forex news.
At some point one or more of your price alarms hits and will go off and the
forex market starts moving. Now you get in front of the computer to see if you
should enter a trade. Price alarms will tell you that the market is
moving but you still need to verify your entries. There is a new tool now
available for entry management and verifying trade entry decisions that most
forex traders have never seen, its called The Forex Heatmap®.
The Forex Heatmap® tells you at a glance what currencies and pairs are
strong or weak and verifies whether or not you should enter a buy or sell on
the the pair where support and resistance is broken, Or it could possibly
identify an entry on another pair in the same parallel or inverse group of
pairs. Price alarms detect price movement but it could be a price spike or fake
out (as discussed in the module above). You need to verify your forex trade
entries with a reliable tool. To use The Forex Heatmap® effectively
you need a step by step guide to using it.
Reading the Forex Heatmap® is not difficult. For different heatmap
configurations you can quickly see the pockets of strength and
weakness on the spot forex at a glance and get your trade platform ready when the
configurations are set. Forex trading just got a lot
easier using this web based forex software. You can learn what forex trade entries look like and
trade much more safely with this tool. Our library of Forex Heatmap®entry signals will show you various examples of trading signals for 28 pairs.
Zones and Clusters of Support and Resistance
THIS FOREX CHART SHOWS A CURRENCY PAIR STUCK IN A CLUSTER ON
THE BOTTOM RIGHT, IT ALSO SHOWS A DOUBLE BOTTOM
Sometime a pair is stuck in a broad range dominated by layers and clusters of
support and resistance and the trend charts indicate choppiness. This means
that the pair is bouncing up and down in a fairly wide price range and is
incredibly difficult to trade. The market is not always trending or oscillating
in some beautiful smooth pattern. Trading a market like this is riskier and the
incidence of stop outs is more frequent. Trade durations are shorter and
movement cycles typically last only through one London-USD trading session and
then you would exit trades, or else not trade at all. This is easy to recognize
just look at the charts but most forex traders do not understand this concept
at all but if they did their forex trading would improve. If you want to learn
forex try to take this concept forward.
Layers of support or resistance are also referred to as choppy markets, tight
ranges, clusters, tunnels, and not to confuse anyone with terminology but they
are all danger signs pointing to riskier trades. Trading pairs with a lot of
room to move up and down, and not stuck in clusters, is easier.
On this chart above I have one example of a support cluster, Its best not to
trade until the price breaks out of the cluster then it will be able to move
much easier to trade and larger trends will form. Price alarms should be set on
both sides but outside of the cluster at resistance and support looking for a
clear shot at pips. The chart shown above is an H4 time frame on our free
indicators using the Metatrader forex trading software.
Support and Resistance Technical Paper
Prior to writing this article a short original article about using price alarms was written by Mark Mc Donnell. You can also review that article for more ideas about using support and resistance.
Support and Resistance Slideshow
This part of the article discusses a
complete library of support and resistance slides that you can view on Flickr.
It demonstrates many examples of short term and long term support and
resistance and clusters (layers), also double tops and bottoms and how to set
price alarms. Click on any slide and you will go into the "slideshow" mode so you can inspect each example chart more carefully.
Throughout this article we have
referenced a set of free trend indicators and price alarms, in order to set up
these free forex trend indicators just click on the link above and follow the instructions. You will find a complete set of instructions for setting up
the free trend indicators, price alarms, and Metatrader charts that you see
throughout this article.
The Forex Heatmap® also has a
complete user guide for managing entries after your price alarms go off, the
link to this valuable resource can also be easily be found in the links below.
Summary and Conclusions
All forex trends start and end at support and resistance, all consolidations,
retracements and reversals start at support and resistance on the spot
forex. Let's all work to become experts and strive to be the best support
and resistance analysts possible.
and inverse analysis of the spot forex can be used two different ways, when
conducting the overall market analysis, and at the point of trade entry. Very
few, if any, forex traders understand these concepts but as a forex trader the
information is critical. If you do not understand parallel and inverse analysis
you have almost no chance of being a successful forex trader, but your odds
increase dramatically if you understand it well. It can be learned in a very
short period of time.
and Inverse Analysis
Parallel and inverse analysis is the study of how individual
currencies influence the movements of currency pairs and their intra-day
movement cycles or within the context of a trend. It has also been called currency
correlations and individual currency analysis. Few, if any, forex
traders understand these concepts and essentially nobody is educating traders
on this subject. However forex trading success would skyrocket if forex traders
would master these concepts. Parallel and inverse analysis of the spot forex
can be learned in about two to three weeks by any forex trader at any level.
Major Individual Currencies
Here are the eight most widely traded individual currencies in the spot forex
that we will examine in this article:
USD US Dollar
CHF Swiss Franc
GBP British Pound
JPY Japanese Yen
CAD Canadian Dollar
AUD Australian Dollar
NZD New Zealand Dollar
Please note that an individual currency is not a currency pair, it seems very
simple and fundamental but it is the crux of this entire technical paper and
essential to learn forex trading. Remembering that a currency pair is comprised
of two separate currencies will open your eyes to the pips.
and Inverse Pair Grouping Examples
An example of a parallel group of currency pairs is as
The EUR is on the left in all pairs and is the common individual currency.
An example of parallel and Inverse group of pairs is as follows:
GBP/CHF AUD/CHF NZD/CHF
The CHF is on the right on all pairs but on the left on the CHF/JPY, the CHF
is the common individual currency. This occurs on other currency pair
groups. These are the very basics to learn forex and parallel and inverse
Discussion of How and Why Currency Pairs Move
If the EUR/USD is rising
and the USD/CHF is falling
then the USD weakness is controlling and "driving" the movement of
both pairs, the USD is weak.
If the EUR/USD is rising
and the USD/CHF is also rising
then the USD is not controlling the movement. The EUR strength is causing the
EUR/USD to move higher and the CHF weakness is causing the USD/CHF to rise. In this case the EUR is strong and the CHF is weak so the best pair to trade
would be to buy the EUR/CHF. The USD is completely out of the picture in the
second example as far as what was driving the driving movement of the market.
These are two of the most basic examples. Not knowing this basic information
represents the biggest failing of forex traders worldwide. Although this
relationship between pairs and the real reasons for their movement being the
movements of the individual currencies is simple and basic it escapes nearly
every trader, although the logic is incredibly clear.
This simple, basic logic works for all 28 currency pairs derived from the
eight most widely traded individual currencies in the spot forex listed above and can
generate up to 500 to 1000 pips of forex trading profits in a single week of trading, if the market is trending on a lot of pairs.
Lets look at one more example using different pairs and currencies but the same logic.
If the AUD/USD is rising
and the USD/CAD is falling
then the USD weakness is controlling and "driving" the movement of
both pairs, the USD is weak.But if both of these pairs are rising the USD is
not controlling the movement and the best pair to trade would be to buy the
AUD/CAD. This is the same logic as the EUR/CHF examples above but this time
we are using different pairs and currency groups.
Once again, each currency pair has two individual currencies, by looking at
other currency pairs in the same groups of pairs you can quickly determine what
is driving the movement. In the case if the AUD/USD and USD/CAD example they
are either moving in he same direction or opposite directions, or on some
trading days not at all.
In this example above the EUR/JPY has been dropping for several days
based on some simple trend indicators like exponential moving averages.
There is a link at the bottom of this article to a set of simple trend
indicators like these. You can check several EUR pairs or several JPY
pairs over the same time period on the x-axis and quickly determine if the downward
movement on the EUR/JPY over this time period was based on EUR weakness
or JPY strength, or possibly both.
If the EUR/CAD, EUR/GBP,
EUR/USD and EUR/CHF are all falling over the same time period then EUR
weakness is driving the movement over this cycle. If the GBP/JPY,
CAD/JPY and AUD/JPY are all falling over the same time period, then the
JPY strength is the reason that the EUR/JPY dropped. This is incredibly
simple but ignored by almost all forex traders.
Next the EUR/JPY
stalls at support, Point 1 on the example chart. If it reverses back
to the upside at Point 1 once again checking a few pairs will quickly
tell you if EUR strength or JPY weakness is driving the EUR/JPY back up.
Now apply this logic to any one of 28 currency pairs comprised of the
eight major currencies. Almost immediately you will start to
understand why currency pairs move. You will also start
to get many more pips out of your trading using the basic individual
currency movements. This forex market logic presents itself daily to
forex traders but almost no forex traders notice. The forex indicators
and systems available now to forex traders do not take this simple logic
into account and these systems are all fundamentally flawed.
Using Parallel and Inverse Analysis to Analyze The Forex Market
Now that we know the basics about parallel and inverse analysis lets move into some new concepts.When
you analyze the forex market always analyze currency pairs as a group,
by individual currency, not individually as a single pair. Currency
pairs are not an island. Analyze all of the USD pairs together, then
analyze all of the JPY pairs together, then analyze all of the CAD pairs
together, etc. If you do this every day the trends of the market, oscillations and consolidation
cycles will jump out at you right off of your charts and into your lap.
If a particular group of pairs are all behaving the same way the
market becomes a heck of a lot easier to trade. It is also very easy to
spot choppiness or a more difficult market and you may consider not
trading at all today, and with good reason. Getting forex
traders to do it this way is nearly impossible. But it is imperative to
analyze pairs carefully. Doing so will allow you make better decisions
as to when to trade and it will make a lot more sense as to why you
should stay in your trades. For example if you buy the AUD/CAD and the
AUD/JPY and AUD/USD are also trending up its alot easier to make an
effort to stay in the trade for a longer period of time based on overall
AUD strength. This concept works for any pair and thats why the method
Here is an example of how to correctly use parallel
and inverse analysis to analyze the condition of a particluar currency
pair. For example if you would like to conduct an analysis of the
USD/CHF, you would first conduct an analysis of several USD pairs using
multiple time frame analysis. Conduct multiple time frame analysis of the
USD/CHF then repeat the analysis on the EUR/USD and GBP/USD, at a
minimum. You would be looking for consistent strength or weakness,
trends, oscillations, or movement cycles in the USD. In the event that
there is no agreement in the 3 USD pairs you could also conduct an
analysis of the GBP/CHF and EUR/CHF looking for consistent trends and
movement cycles based on CHF strength or weakness. By analyzing
the USD and then the CHF you have completed your analysis of the
USD/CHF. Is this what forex traders do?? No they do not, but it works and
it work on any pair any day the forex market is open.
Then you would know for sure whether or not the USD/CHF is trending or
oscillating and whether the reason was USD strength or weakness or CHF
strength or weakness, then you have done the analysis correctly and
thoroughly. Most forex traders will not do this and most forex traders
are not thorough. They want something that is quick like forex
robots or forex news trading and they subsequently lose money. But doing
it this way is totally logical and starts to reduce or eliminate entry
risk of forex trades.
How Currency Pairs are Constructed
section is incredibly basic but almost every forex trader is completely
blind to it. It is a major failing of almost every forex trader.
forex traders treat a currency pair like a single unit, or an island in
the forex market. This is a huge error and almost every forex trader
does this. They take a currency pair like the EUR/USD and treat it as a
single thing, single object or single unit, which is a major and a
massive mistake. This is not only a mistake but also a complete fallacy
and a complete falsehood that leads to consistent failure.
EUR/USD is composed of two individual currencies each with their own
separate behavior, fundamentals, current condition, news releases, and
reasons for moving up and down. In order to analyze the EUR/USD you must
analyze the EUR currency separately and the USD separately.
Look at it this way, which is confusing:
or look at it this way, which is much more accurate EUR USD
This visual should tell you how to think about separating the two currencies in any pair for individual analysis.
EUR and USD are two separate currencies that can both be weak, both be
strong, or both be moving in opposite directions at any time in a
trading session or within the context of the current market trends. I
have tried and hopefully succeeded in proving this so far and especially
in the section about market analysis just above this section.
sum of the parts equals the whole and 1 +1 equals 2 in the forex. The
minute you start to treat the EUR/USD as a single unit you have failed
before you ever enter your first demo trade. The minute you start to view the
EUR/USD as two separate currencies and analyze each currency separately
then you not only have a chance to succeed with forex trading, but pips
will begin to fall in your lap with some information that is obvious and
incredibly basic but completely overlooked by almost all forex traders.
Now you can apply this same logic to any currency pair, it works.
Individual Currency Strength and Weakness
Now that you know how a currency pair is constructed lets investigate further.
all forex traders apply technical indicators to currency pairs, after
you read this section of the article you may never do it again or you will
at least wonder why you ever did it in the first place. I have
literally seen forex traders take every technical indicator off their
computer and charting system after realizing that what you are about to
read below is true.
Back to the EUR/USD again. If you buy the
EUR/USD the only way it will rise is if the EUR as an individual
currency is strong or the USD as an individual currency is weak or both.
The best scenario is both because the EUR/USD will appreciate the
fastest under these conditions. This is also true if you buy Euros with
US dollars at a currency cashier or buy the EUR/USD online with US
dollars. It works the same way.
Buying the EUR/USD implies
buying the left (base) currency and selling an equivalent amount of the
right (quote) currency to pay for the base currency. For example,
buying EUR/USD means that you are buying Euros and using US dollars to
make the buy, or selling US dollars.
This concept must be fully
understood or your forex journey will be short and you will "blow up"
account after account and not know why. Technical indicators do not
take individual currency strength or weakness into consideration. They
never have and they never will and we have difficulties seeing how any
technical indicator could work at all except for scalping. Scalping is
not trading, scalping is scalping, and there is not a forex trader alive
who will admit that they enjoy it.
There are over 150 technical
indicators and over 100 candlestick chart types available to forex
traders. But indicators do not drive movement on a currency pair. The
only thing that drives movement on a currency pair is the currency
strength or weakness of the two individual currencies that are in the
pair, that's it, that is all, nothing else. In this regard technical
indicators are somewhat worthless because none of the 250 indicators can
measure this. Technical indicators are applied to pairs not individual
currencies, and that is the failure point.
An analogy is this, the
only way a car can move is if you step on the gas pedal, this is what
actually causes the car to move. Individual currency strength and
weakness is the gas pedal for a currency pairs, this is what makes them
move. Technical indicators do not make currency pairs move they just
"indicate". Indicators are nothing more than drawings on your computer
Since technical indicators are applied to currency pairs,
not individual currencies, people who use them are 99% likely to fail.
The failure rate of forex traders is incredibly high and now everyone
can see why.
I strongly suggest that forex traders start using
parallel and inverse analysis to analyze individual currency groups, and
individual currency pairs. Traders can also use parallel and inverse
analysis of individual currencies also at the point of trade entry in
lieu of technical indicators. This is the entire method and rationale
The entire forex industry is "steeped" in
technical indicators and forex robots based on these technical
indicators and slowly forex traders are getting fed up with all of this
and looking for viable alternatives with credible logic behind them.
These technical indicators originally migrated over from the stock
market and stocks in no way behave like currency pairs nor are they
constructed like currency pairs.
Trends in the Forex Market
intermediate or longer term trend can be created by the day to day
dynamics of the forex market. As an example lets say that the USD/JPY
is consolidating sideways then starts an intermediate to long term
uptrend and continues through that trend for a few weeks or a few
months. Throughout the course of the trend the movement
drivers could be the USD strength or the JPY weakness on a day to day
basis because the market dynamics can change day by day. In between the
movement cycles the pair consolidates or retraces. Almost no forex trader can explain what a trend really is on the forex, even people who claim to be a trend trader. This
is because they do not understand parallel and inverse analysis. A
trend on a currency pair is nothing more than a long series of
continuous market dynamics on both sides of the pair that favors
movement in one direction. In order for the USD/JPY to build a trend
that lasts for several weeks either the USD must be weak or the JPY must
be strong or both throughout most of the period. If you
analyze the forex charts of other USD pairs or other JPY pairs during
the period of time when the USD/JPY is trending at least one of those
groups will be trending in the same direction. Parallel and inverse
analysis wins again with obvious, simple and logical analysis. It wins
every time because it is the logic behind the spot forex. Learn parallel
and inverse analysis and you will learn to clearly identify and capture
pips from forex trends.
This picture depicts a longer term uptrend on the EUR/JPY using simple
trend indicators like exponential moving averages. The up trend forms off of the support. The black line
represents the movement cycles and consolidation cycles on a
conventional price chart like a bar chart, simplified with a black line chart. Each individual up cycle within the trend is
either EUR strength or JPY weakness or both. Nothing else. Its that
that a trend on a currency pair is a long series of movements and
market dynamics on both sides of the pair that favors movement in one
direction. In this case each move off of support is EUR strength or JPY weakness. This works on all 28 pairs we follow.
Ranging and Choppy Markets
just finished discussing what a trend is and what drives a trending
market, currency pair or group of pairs, now lets discuss a totally
different type of market, a ranging or choppy forex market.
again parallel and inverse analysis comes to the rescue. You now have
some new thoughts and ideas as to how to spot a choppy market or choppy
group of pairs using parallel and inverse analysis methods.
speaking a ranging market can take on two forms. Currency pairs ranging
up and down in large oscillations that are easy to spot and trade. Or
tight ranging choppy markets that are so difficult to trade that its
best to walk away. In a tight ranging forex market the drivers (market
dynamics) change almost daily. One day the AUD is strong the next day
the CAD is weak and the next day the USD is strong, etc., and it just
continues for days and days. In a trending market the market dynamics
change far less frequently.In a choppy market the individual
currencies driving the movement change much more frequently or almost
daily. Or else the same group of pairs moves in different directions on
consecutive days. Once again each currency pairs has two sides, so
either side of the pair can be driving the movement. If you can identify
what parallel and/or inverse group is driving the market you can
successfully trade every day. When do the drivers market switch??? They
switch drivers during the intra-day consolidations that generally occur
after the main trading session and USD session are complete. If you
are interested in buying or selling a particular currency pair and you
read how to properly analyze the forex market you should be able spot a
difficult to trade choppy market rapidly. If you conduct a multiple
time frame analysis on the USD/CHF and you suspect it is choppy as
evidences bu tight trading ranges down to the H1 and M30 time frames,
immediately go to the other USD pairs and CHF pairs to confirm. If all
of the USD pairs look the same or all of the CHF pairs look the same you
have confirmed that that pair or group is choppy. You may still be able
to trade another pair then check the USD/CHF again tomorrow.
you are stuck analyzing and trading the same currency pair day after day
without checking other pairs in the same individual currency families
you will be ignorant of the market condition that exists on the same
group of parallel and inverse pairs. This ignorance will result in
stop out after stop out and you will never ascertain why the stop outs are
The reason you will be stopped out is a lack of market
information which is clearly visible in a simple set of forex charts
and trend indicators that you simply have not checked. These charts are
right there on your computer but you have not checked them. You must
look at the market deeper.
Conversely identifying a trending
market will become much easier as well by checking the parallel and
inverse pairs. If the USD/CHF looks like its in an uptrend a quick check
of the USD and CHF pairs will confirm the trend. Your trading
confidence will skyrocket. This is why all forex traders should review
the condition of as many currency pairs as possible in your day to day
market analysis routine in the same parallel or inverse currency
families that you are interested in trading. Using multiple time frame
analysis and drilling down the time frames will unveil what is going on
with the pairs you are interested in trading. Combining the multiple
time frame analysis with parallel and inverse pairs becomes very
powerful and few, if any forex alert services utilize these analysis techniques.
You may not even trade some of the pairs you analyze
but you will know what is going on in the market. As a trader that is
your job, to know the condition of the market by examining the forex
charts systematically to assist with your forex trading, entries, and
trade planning. Identifying a choppy or trending market becomes much
easier, and at some point, second nature.
Using Parallel and Inverse Analysis at the Point of Entry
that we know why pairs move and how to use parallel and inverse
analysis to analyze the spot forex, we can now also apply this knowledge
to trade entries.
The number one question forex traders have is "When do I enter??", quite naturally. Once
again parallel and inverse analysis will solve this problem. Entry
management with parallel and inverse analysis is another application.
After you analyze the forex market and you write up your trading plan,
you can then set your price alarms at critical areas of support and
resistance across some key pairs. Exact instructions to do this are in
my article on support and resistance and price alarms. When the alarms go off parallel and inverse analysis can be
used for accurate trade entry management. Forex traders need to know
when to get in, when to stay out, and when to look at another pair. They
need an entry management tool that verifies the trade entry, and here
This visual map of the spot forex is called The Forex Heatmap® and
it tells you which individual currencies are strong and weak in real
time, it utilizes parallel and inverse analysis to tell a trader what
pair to enter and in what direction across 28 pairs. Its basis is
parallel and inverse analysis and individual currency strength and
weakness. Throughout the trading week sometimes you can
get a “slingshot effect” when a currency pair has a dual driver, one
individual currency is strong and the other is weak. Here is an
example….If the EUR is strong across the board (all EUR pairs are green
on the heatmap) and the USD is weak across the board, then the EUR/USD
will “slingshot” and move higher at a much faster rate. A pair with the
volatility level on like the EUR/USD will move at least 150 pips under
these conditions. Some of the GBP pairs can move 400 pips in one
trading session. Trading with technical indicators is no longer
necessary and after using a tool like this does not even seem to make
Summary and Conclusions
vast majority of forex traders, almost all of them, don’t even know
what parallel and inverse analysis is, much less understand it or use it
daily in their forex market analysis or trade entries. I am asking all
forex traders to become experts at parallel and inverse and use it to
analyze the market and to verify your trade entries. Forex traders will never
realize the real profits of the market until they become experts at
parallel and inverse analysis, which drives the movement in the entire
market every day. Technical indicators and the forex robots based on the
same technical indicators proliferate the forex trading communities and
cause a lot of grief and trading losses. Forex traders want and need
alternatives that work to produce solid pips. Thorough
knowledge of parallel and inverse analysis will permanently change the
way you think about the forex and give you solid a rationale as to why currency pairs move.