Hi all
This is a basic question and I would just like confirmation so I know I am going in the right direction with things.
I trade the H4 and the H1 time frames. It seems to me that the 1:1 opportunities are mostly in the H1 time frame and the 1:2+ RR opportunities are in the H4+ time frames (generally speaking).
Would people here say this is more or less correct or is there another way people see it?
Thanks
Matt
Hello, Matt
Lots of thing are bigger on higher time frames, but RR ratios – objectively determined – are not among them.
Try this experiment: Pick any one-hour chart, and remove the times from the x-axis, and remove the prices from the y-axis. Then, pick a daily chart – of the same pair or a different pair – and remove the dates and prices from the chart axes. Finally, place one chart above the other on your screen, and study the resemblance between the two.
Probably your platform has rendered both charts with approximately the same number of candles, and therefore individual candle widths will look similar on the two charts. Even more striking will be the similarity in candlestick patterns. and in those elements we typically refer to as market structure.
What you are observing is what we call the fractal nature of price charts. The term fractal refers to patterns which repeat on different scales, from small to medium to large. In financial markets, including our own forex market, those repeating patterns are seen on various time frames, and they actually appear on all time frames, from one-minute to one-month.
Elsewhere I have posted sets of charts with times, dates, prices, and pair-designations removed, and challenged readers to guess which chart displays which time-frame. Most people get it wrong, which simply illustrates how fractals (similar price patterns) exist everywhere, in every time frame.
As you know, a specific candle simply displays all the price action within its time period as a single, vertical column. You can think of a daily candle, for example, as gathering 24 hourly candles together, such that the highest high from among those hourly candles becomes the high of the daily candle, and the lowest low from among those hourly candles becomes the low of the daily candle.
As a result, the height of an average daily candle, from its high to its low, represents a greater number of pips than are represented by the height of the average one-hour candle.
So, if you were to identify and label the swing highs and the swing lows on the two charts in this experiment, the swings on the daily chart would represent much larger price moves, than would be represented by the swings on the hourly chart.
If you then used the swing highs and swing lows on those two charts to represent levels of resistance and support, respectively, and planned trades based on those S/R levels, you would be aiming for much larger profit targets on the daily chart, than on the hourly chart, and you would be placing much deeper stop-losses on the daily chart, than on the hourly chart.
The result would be that your RR ratios on the two charts would be similar. If your risk and reward were both 20 pips on the hourly chart, and 60 pips on the daily chart, then your RR ratio would be 1:1 on both charts.
If you find that your RR ratio is 1:1 on a lower time-frame, and 1:2 or greater on a higher time-frame (as you suggested in your post), then the likely cause is that you are applying a fixed-size stop-loss to all trades, on all time-frames. This is not a good way to determine stop-loss size.
When you plan a trade, you should let the market structure you see on your chart define a probable profit-target, and you should let your chart define a rational stop-loss. Then, you should compare those metrics to determine whether the trade you are contemplating offers you a Risk:Reward proposition that meets the criteria of your Trading Plan.
If your Trading Plan stipulates an RR of at least 1:1, but a potential trade – with objectively defined TP and SL – offers you less than 1:1, then you simply abandon that trade, and look for a better opportunity.
Where stop-losses are concerned, one size does not fit all. A relatively tight stop-loss, appropriate for a one-hour chart, will be an invitation to the market-makers to pick you off, if you apply it to a daily chart.
At first glance, it appears that all the metrics pertaining to a one-hour chart are simply scaled up on a daily chart. The candles are larger (high to low, in terms of pips), the profit targets are larger, and the stop-losses are larger.
But, one thing that has not been scaled up is your predetermined risk percentage. Therefore, as your stop-losses have increased in size, it’s important that your position sizes have decreased in inverse proportion. That is, stop-losses that are twice as large, for example, require that positions be only half as large.
My apologies for this wall-of-text. I hope you can find something of value in all my rambling.
Wow. Now I completely understand it, its like a lightbulb has lit up in my head. That last paragraph about your stop losses increasing in size should mean your position size decreases really makes sense too. Thank you very much for putting the effort in to give me such a detailed answer, it is much appreciated.
Matt