Confirmation is Key: The Role of Price Action and Multi-Time Frame Analysis in Trading NEPSE

When trading in the Nepal Stock Exchange (NEPSE) or any financial market, technical analysis plays a crucial role in identifying trade opportunities. However, one of the biggest mistakes traders make is acting on signals from a single time frame without proper confirmation. Confirmation is key in technical analysis, and one of the most effective ways to achieve it is by analyzing price action across multiple time frames.

This article delves into why confirmation matters, how lower time frames help in detecting trend changes, and why price action is the most reliable tool for traders in NEPSE.

The Importance of Confirmation in Technical Analysis

Confirmation in technical analysis means verifying a trade setup using multiple indicators, time frames, or price action signals before executing a trade. Without confirmation, traders risk entering premature trades that may result in losses.

In the context of NEPSE, where liquidity and volatility can be relatively lower compared to global markets, false breakouts and misleading signals are common. Relying on a single signal, such as a moving average crossover or a breakout, without confirmation can lead to poor trading decisions.

For example, if the NEPSE index is showing a breakout on the daily chart, traders must confirm whether this breakout is supported by momentum on lower time frames. A breakout without volume confirmation or supporting price action could be a trap, leading to a sharp reversal.

One prevalent mistake often observed among novice technical analysts is the tendency to purchase stocks as soon as they reach the support level indicated on their charts. While support areas can indeed represent favorable zones for buying, it is generally not advisable to make a purchase immediately upon reaching these levels. This approach can expose traders to significant risks and may limit their profit potential. Below are some recent chart patterns that suggest support levels should not be viewed as automatic buy signals.

Fig 1, NEPSE Index exhibiting a decline from its support level.

Price Action: The Most Reliable Confirmation Tool

Price action is the study of market movement based on historical price data without relying on lagging indicators. In NEPSE, where liquidity can sometimes be thin, price action becomes even more important as it reflects real-time market psychology.

Multi-Time Frame Analysis:

Looking at Lower Time Frames for Trend Changes One of the most effective ways to confirm trends is by analyzing multiple time frames. This approach helps traders understand the market structure better and avoid false signals.

Higher Time Frame (HTF) Analysis (Daily, Weekly Charts)

• Shows the overall trend direction in NEPSE
• Helps in identifying key support and resistance zones
• Determines whether the market is in an uptrend, downtrend, or consolidation

Lower Time Frame (LTF) Analysis (Hourly, 15-Minute Charts)

• Provides early signals of trend reversals or continuations
• Helps in identifying entry and exit points more precisely
• Confirms whether a breakout or breakdown on the higher time frame is valid

For instance, if the NEPSE index is forming a bullish pattern on the daily chart, traders should check the 1-hour or 15-minute chart to confirm if buyers are stepping in with strong price action. If the lower time frame shows signs of rejection or weakness, it might indicate a potential pullback rather than a true breakout.

Fig 2, Current Daily NEPSE Index Price Chart

The index presented above clearly illustrates the NEPSE Index declining from multiple support zones. It is important to note that beginner traders often enter the market within these support zones, interpreting trend changes observed in lower time frames. Therefore, it is essential to seek confirmation of price patterns through candlestick analysis, trend assessments, or employing effective tested strategies.

Fig 3, Current 1 HR NEPSE Index Price Chart

The above figure clearly state the change in trend with the index closing below the 2665 area (previous support low/lower low ). The index can be stated as bearish in the lower time frame. By adopting the Price action strategy, it can be concluded that the buy for NEPSE is yet be confirmed. The principles of price action clearly signal short sell in the market.

Confirmation is a crucial aspect of trading in NEPSE using technical analysis. Traders who enter trades without verifying signals across multiple time frames and price action setups often fall into the trap of false breakouts and unnecessary losses. By incorporating multi-time frame analysis, traders can get a more comprehensive view of the market, ensuring they trade in the direction of the dominant trend. Additionally, price action remains the most reliable tool for confirmation as it directly reflects market sentiment and psychology.

Before executing any trade in NEPSE, always look for confirmation—whether through price action signals, volume, or lower time frame analysis. By doing so, traders can improve their success rate and reduce the risk of unnecessary losses.

Article By: Suraj Bidari