[B]Student’s question:[/B]
As the SMA 200 shows a uptrend market, I will
- Wait until the pair pulls back to the support line
- Observe the formation of the candlestick that touches the support line
- Fine tune with an uptrend in the 4 hour chart (for further confirmation)
- Place a LONG position upon the formation of a new candlestick (5pm EST) after candlestick/s before it confirms a reversal (long wick, bullish engulfing etc).
- Place a stop order 10 pips below the support line (to cater if the trend breaks)
- Place a limit of at least 1 : 2 of the risk : reward ratio.
Question: A candlestick in a daily chart carries a higher number of pips compared to a 4 hour chart. To avoid higher risks, is it better to place a position using the 4 hour chart or the daily chart?
[B]Power Course Instructor’s Response:[/B]
You are doing this just fine…well done.
My only concern would be the 10 pip stop that you mention. On any time frame chart, Daily, 4 hour or 1 hour, it is quite possible for price action to easily “wick” 10 pips or more below a trendline and then close above the trendline and move quite a distance in your intended direction…to the upside in this instance. Based on the Daily chart that you post, even a stop of 20-40 pips would provide a favorable risk reward ratio for the trade.
Regarding the second aspect of the question…
Using a 4 hour chart or a 1 hour chart will offer more favorable (less deep) stops in most instances. Depending on account size, since we do not want to risk more than 5% of our account at any one time, the Daily chart could be used for trend determination while the 1 hour or 4 hour could be used for “fine tuning” an entry as well as determining stop and limit placement.
