Whether you trade a 4hr chart or not has nothing to do with how you define your risk or where you set your take profit. Remember, the 4h chart’s price bar is pretty much just the conglomeration of 16 underlying M15 price bars. A 10-pip stop loss would be hit the same regardless of whether you’re watching a 4hr chart or a 5 minute chart. Same goes for a 20-pip take profit. The reasons why people talk about setting a wider stop loss on higher timeframe charts is because of perception. Looking at a 4hr price chart will reveal certain patterns and those patterns are what technical traders use to draw lines and make predictions based on those lines. Even if they are right, though, it takes a greater amount of time for price to hit those lines than it does if one switched to a 5-minute chart and drew the prediction (anticipation) lines the same way. This means that they typically will respond by setting a wider stop loss.
As to total profit on smaller trades vs. larger trades…the bottom line is that profitability is based on three factors. Win rate, risk/reward ratio, and trade frequency.
Here’s how this might play out. Let’s say that you are going to risk 2% on any given trade and let’s just assume that you got lucky and they were all winners for this example.
In Example A we have just one trade. You pack 2% risk into a 100 pip stop loss and target 200 pips for a take profit. So if price goes against you then you’re out 2% of the account. But, like we said, this is all winners so you win. The 200 pips means that your 2% doubled to 4%…leaving out commission. Your account is now up 4%
Now let’s say you look for smaller take profits and thus you risk fewer pips. Let’s also say you risk 2% on each trade. Let’s assume you win all trades. Also, and this is the key part, since you are looking for smaller movements in price before taking profit, you find more trading opportunities (because prices makes smaller movements more often than it does larger movements) and thus take more trades.
So let’s say you take 10 trades with a 10-pip stop loss and a 20 pip take profit. Those 10 trades earned you 200 pips. But each of those wins represented 2% of the account, right? So that means you earned 2% x 10 trades or 20% in this example. Same total # of pips won (200) but Scenario #1 earned a 4% and Scenario #2 earned 20% balance increase.
If, however, you reduced the position size by a factor of 10 on the smaller trades, then the amount you would have made taking smaller trades would have been equal to the single larger trade.
…except for the fact that it wouldn’t REALLY work out that way. Why? Well, let’s just assume that with good analysis you were able to tune this system so that your odds of winning any given trade are 50/50. In Example A you’d be taking one trade so your chances are 50/50 that you’d win those 200 pips. But what are the chances that you’d win all 10 of the smaller trades in a row so that you could match that one larger trade? I can tell you that it’s not a 50% chance that you’d win all 10…even if you could work a 1:2 risk/reward system at 50%. So if you scaled down the position size on the series of smaller trades, you’d probably end up with less profit than on the larger trade simply because it’s highly unlikely that you’d actually have a high enough success rate to make it work.
THIS is why people use higher leverage. Because on smaller trades the spread eats up more of the profits on each winner and adds more loss to each individual loser…so larger positions sizes must be put on and matched to higher trade frequency in order to make a good profit. The larger the positions size, though, the more leverage needed.
Hope this lended some perspective. The short answer is that you can actually make more money with the smaller trades simply because the trade frequency is higher… but you take on more risk doing so.
