Trends, micro-trends and time frames

Important in trend-following is to know your time frame and which trend you’re following. It’s easy to forget.

Sometimes a trader may start off on a 4H time frame and then see and opportunity on a 1D time frame. The initial acceptable loss (the stop-loss) would have been determined on the 4H. Switching to a higher time frame and keeping the same stop-loss  as a lower one is not a good idea. Why? It means you’re not giving price sufficient room to bounce around. If one is switching to a higher time frame a whole new risk assessment should be carried out.

The composite chart below shows three time frames. On the daily time frame (1D) a reasonable stop-loss going long at this stage, would be about 400 points down. On the 4H its probably 300 points down (using Guppy countback method) going long. But see the micro-trend heading south on the 1H chart where it would have been possible to enter short and make some profits. It is possible to remain long on a 4H time-frame and go short on a smaller time frame in a separate trade. This is not advised as a strategy. It depends so much on acceptable loss – and there are greater risks of being whip-sawed.

2016-05-22_15-56-47_gbpaud_composite

In general it is better to stick with your trend. There is no rule saying that a small trend cannot over-power a trend on a higher time frame. We don’t know what will happen. We’re only following – not predicting.

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