The Rule of Three in Multi-Timeframe Analysis | Real Trading (2024)

Multi timeframe analysis is the process of making trading decisions by looking at several timeframes first. The strategy is helpful because it helps traders identify the primary trend and potential support and resistance levels.

In this article, we will look at the multi-timeframe analysis and how you can use the rule of three to succeed.

What is multi-timeframe analysis?

As mentioned, this is a trading approach where a trader looks at several key timeframes before they initiate a trade on assets like stocks, currencies, commodities, and exchange-traded funds. It is an approach that is used by all types of traders, including scalpers, swing traders, and position traders.

When used well, multi-timeframe analysis can help you make better decisions. For example, a currency pair may be in a strong upward trend on a 5-minute chart. But when you zoom out in a daily chart, you find it in a deep consolidation phase

What is the rule of three in analysis?

Rule of three is an unwritten rule that recommends that a trader should use three timeframes before they initiate a trade. Proponents believe that looking at three timeframes will help a trader identify all the necessary points they need to execute a trade.

For example, a scalper who focuses on extremely short-term charts can use three timeframes like: hourly, 30-minute, and 5-minute. Alternatively, they can use a 30-minute, 15-minute, and 5-minute chart. Other scalpers start at 15-minutes and then narrow to 5-minutes, and 1-minute.

While many day traders look at multiple charts when making decisions, long-term traders don’t focus on it. That’s because many of them focus on fundamental analysis to identify whether to buy or sell a financial asset.

Benefits of this strategy

There are several benefits of using the rule of three in day trading. First, the long chart will help you identify the asset’s primary trend. As such, it will help you make better decisions in the market.

Second, it is a relatively straightforward strategy that you can use to enter and exit positions. Third, it is a rule that helps you identify support and resistance levels as as we are about to go to see in the Apple chart below.

Finally, the rule of three is an essential trading strategy since it can help you avoid making simple mistakes like entering a short trade when an asset has just moved above a key resistance point.

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Why the rule of three is important

The rule of three is an important one in day and swing trading for three important reasons. First, it helps traders identify trends in the market. For example, on the daily chart below, we see that Apple shares are in an overall bearish trend.

Related » How to spot a trend early

Notably, we see that they have formed what looks like a double-top pattern and a death cross. A death cross forms when the 200-day and 50-day moving averages make a bearish crossover.

Therefore, as a day trader, you have a good idea on the overall state of the market. At the same time, we have identified key support and resistance levels in the market.

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Now, when you narrow down to the hourly chart, you see that the stock is near the support level at $132 as shown below.

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Confirm/invalidate primary trend

Second, rule of three is an important strategy because it helps to confirm or invalidate the primary trend. As shown above, we see that the stock is clearly in a downward trend on the daily chart. The same is also seen when you narrow it down to the hourly chart.

Find entry and exit points

Finally, rule of three can be used to define potential entry and exit positions in a trade. In the initial chart, we saw that $132.84 is an important support point since it was the lowest level on May 23rd. Therefore, you can execute a short trade and then set your take-profit at that level.

Best time combination in rule of three

A common question among traders is on the best time combination when you use the rule of three in market analysis.

There is no correct answer to this since traders use different trading strategies. For example, a scalper will often use different combinations compared to swing traders.

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Scalpers

For s scalper, the ideal combination is 30-minute, 15-minute, and then 5 -minute. On the other hand, a trader using the 1-minute trading strategy, an ideal combination can move from 15, 5, and 1. These are the most popular timeframes.

Day traders

On the other hand, for day traders, an ideal combination can move from 1-day, 4-hour, and then 30-minute chart.

In this, the daily chart will show the primary trend while the four-hour chart will help you to confirm the initial trend. Finally, the 30-minute chart will help you execute the trade.

Swing traders

Swing traders are people who execute trades and then hold them for a few days. These traders tend to execute trades on the 30-minute or hourly chart. As such, a potential combination can move from daily, to four-hour chart, and hourly chart.

Still, it is recommended that you spend a lot of time testing several timeframe combinations to see those that work well. At times, you don’t need to stick to the rule of three. Instead, you can decide to use four charts.

Summary

Rule of three is an important trading strategy in all types of trading. It is essential because it helps to identify entry and exit trades in an easy process. It is not mandatory to use this technique to analyze a trend, but it is certainly supportive especially to avoid abnormal asset movements.

External useful resources

The Rule of Three in Multi-Timeframe Analysis | Real Trading (2024)

FAQs

The Rule of Three in Multi-Timeframe Analysis | Real Trading? ›

Trading with three timeframes is a method of determining entry points into the market by confirming the primary trend on the largest timeframe and subsequently monitoring the market situation on smaller timeframes. It allows traders to receive multiple signals for market entry within the day.

What is the 3 trading rule? ›

Apr 23, 2024. 3. The 3–5–7 rule in trading is a risk management principle that suggests allocating a certain percentage of your trading capital to different trades based on their risk levels. Here's how it typically works: 3% Rule: This suggests risking no more than 3% of your trading capital on any single trade.

What is the rule of 3 in stocks? ›

Many investors are often tempted to do so as they see an opportunity to buy at a lower price. However, the 3-day rule advises investors to wait for a full 3 days before buying shares of the stock. This rule clarifies the importance of patience in making best high return investment decisions. Lower Your Cost!

What is the 3 minute trading strategy? ›

The 3 minute chart trading strategy involves using a 3 minute chart to identify potential entry points. Traders using this approach look for specific patterns within each 3 minute bar, such as candlestick formations or price action signals.

What is the ratio for multi time frame analysis? ›

Key takeaways on mulit-timeframe analysis

When scaling down in time-frames, utilize a ratio of 1:4 to 1:6 between the trigger and the trend timeframes. For example, if you are taking a trade off the four-hour chart, look for the daily chart for trend analysis.

What is the 3 time frame trading strategy? ›

This trading approach allows market participants to instantly react to any price changes, providing flexibility in trading strategy. The combined use of 5-minute, 15-minute, and 30-minute timeframes makes trend identification most effective.

What is the three trade rule? ›

The longstanding rule is that whenever more than three trades are involved, a general contractor is needed. The general contractor is also responsible for researching zoning requirements and obtaining necessary permits.

Why does the rule of 3 work? ›

The audience of this form of text is also thereby more likely to remember the information conveyed because having three entities combines both brevity and rhythm with having the smallest amount of information to create a pattern.

What is the rule of three strategy? ›

The Rule of Three is a very simple way to get better results with skill. Rather than get overwhelmed by your tasks, you get intentional about your three victories that you want to accomplish. Think in Three Wins. This puts you in control, now matter how chaotic things are around you.

What is a good rule of three? ›

The rule of three is a storytelling principle that suggests people better understand concepts, situations, and ideas in groups of three. Over time, the rule has been confirmed by anthropological experts as an archetypal principle that works on three levels: sentences, situations, and stories.

What is the power of 3 trading strategy? ›

Understanding the Power of 3 (PO3) is crucial for successful intraday trading. Power of 3 (PO3) consists of three key elements: accumulation, manipulation, and distribution. During accumulation Price collects orders on both sides of the market.

What is the most profitable trading strategy of all time? ›

One of the ways beginners can implement the most profitable trading strategies effectively is by embracing the buy-and-hold strategy. This involves researching companies with solid fundamentals and stable earnings, then holding their stocks for a long time without being swayed by short-term market fluctuations.

What is the 1-2-3 trading method? ›

The classical approach to pattern 1-2-3 involves opening short positions at the break of the correctional low. The buyers who seriously expect the upward trend to be restored are most likely to have set their stop orders there. Their avalanche triggering allows you to see a sharp downward movement in the chart.

How to trade multi-timeframe? ›

Ideally, traders should use a longer time frame to define the primary trend of whatever they are trading. Once the underlying trend is defined, traders can use their preferred time frame to define the intermediate trend and a faster time frame to define the short-term trend.

What timeframes do day traders use? ›

Day traders mostly use several timeframes, including 15-minute, 30-minute, and hourly charts. The four-hour chart is not common among day traders. Instead, it is popular among swing traders. The benefit of using the 15-minute chart in day trading is that it shows a longer-term view of the price movement.

What is the best time frame for SMC trading? ›

Best time frame for SMC trading strategy: Maximizing clarity and success. For SMC trading strategy, use weekly and daily charts for market direction, refine with 4-hour charts for trade zones, and execute trades on 15-minute charts for precision. This top-down approach maximizes clarity and success.

What are the three golden rules of trading? ›

Let profits run and cut losses short Stop losses should never be moved away from the market. Be disciplined with yourself, when your stop loss level is touched, get out. If a trade is proving profitable, don't be afraid to track the market.

What are the three laws of trading? ›

This is a good time for traders to consider selling the stock, as it is likely to continue to decline in price. The Wyckoff Method is based on three laws: the Law of Supply and Demand, the Law of Cause and Effect, and the Law of Effort vs. Result.

What are the 3 trade restrictions? ›

In general, trade barriers keep firms from selling to one another in foreign markets. The major obstacles to international trade are natural barriers, tariff barriers, and nontariff barriers.

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