Small TF and Large TF
What you will learn:
Larger Timeframes are more reliable
It is hard to trade large time frames because you want to make money fast
Most of you aren’t going to be happy because most of you want to become rich very fast.
If you develop a strategy based on trend, it will be very difficult to do so in smaller time frames, I’d say 60 min and less. Why? Because the market moves only based on the psychology of the group of people trading the asset. The group is constituted of institutional traders as well as retail traders. There are more big players than small players. These big players don’t trade the 1 min chart. They look at trend, levels and technical analysis on much higher timeframes.
One of the easiest way to determine the trend is to look at the price as compared to its moving average, for example the 200EMA: if the price is above the 200EMA this is bullish, if the price is below the 200EMA, this is bearish.
Take a look at the price and the 200EMA on the 4 hours timeframe:
On this example you were 45 days completely bullish. Then you became bearish and the current trend is at 68 days. Would you say that the 200EMA on the 4 hours timeframe is a reliable indicator of the trend?
On this example you were 45 days completely bullish. Then you became bearish and the current trend is at 68 days. Would you say that the 200EMA on the 4 hours timeframe is a reliable indicator of the trend? Pretty Easy.
Now let’s look at the 15 min TF:
We got 3 lucky nice trends to the downside, and this is only because right now we are on a strong downtrend.
When it's not trending beautifully, it is ranging hardcore, you get nothing. No indication. Just fake breakouts here and there.
How would you like to trade trends on this 15 min chart? It is ranging, trending, up, down, ranging, trending, ...
Now, many books, people, big traders, say that the market is ranging 75-85% of the time. I believe it does on the small timeframes.
If you are trying to trade the 5 min chart and you have a strategy that goes long when price is over the 200EMA and you filter trades based on RSI, I can tell you right now that you will have a lot of bad trades, and once you have a good one, you won’t know where to stop/take profit.
The other thing that you should understand is the smaller the timeframe, the shorter the length of your trades. This means also, that if you risk 1% of your balance and you manage to get like 3 or 4 times your risk (as a gain or profit), I think it is a good idea just to take profit. Can it go higher for more profit? Yes absolutely, but the probability is just SO low, because we are on a small timeframe.
Small timeframe = not reliable.
One solution is to add filters to your strategy. So you go long on the price above the 200EMA, you only trade when the RSI crossed over the 65 level, you add an ADX filter, so you enter when the ADX is above 20 and to really be sure you only enter when the K and D lines of MACD had a crossover. Great strategy, you definitely increased the likelihood of a move to the upside – this is a “high probability trade”.
Now look at how many signals a day you get (OPPORTUNITY Course #5) – I bet you don’t get a lot.
So, if you get 1 signal a day, why not trade on the 60 min timeframe? You’d get as many signal and you would have the reliability of the higher time frame.
SO, IS IT POSSIBLE TO HAVE A PROFITABLE STRATEGY ON THE 1 MIN TIMEFRAME?
Absolutely yes, I know of a few strategies that are super good on the small timeframe. Since on smaller timeframe it is hard to get the high probability part AND enough trading opportunities, you basically have to develop a strategy based on randomness. Something that just trades whatever happens.
It also requires a bit of watching. This is still one of my goal, to push some of my current algos to run with absolutely no watching.
If you learn how to create an algo, and you fully grasp everything I write in these courses, you too can develop a trading system that works.
Check out one of my first really profitable algo:
From March 2020, it turns $1,000 into $100,235 January 2022. Not bad right? This is using a 5% risk (pretty high but we are on the 4 hours timeframe so there aren’t signals every single day.
This algo is absolutely great, but I don’t use it because as you can see on the second picture, the drawdown on the capital is extreme – you can see end of 2022 the account balance was over $200,000 and a month later it is down 50%. In the end, we are still 100x on the initial investment, but having a 50% drawdown over a month is mentally very hard to accept. The reason why is because I wasn’t able to find a profitable way to make this algo long and short at the same time. This one only longs. So during bull phases, you feel like king, during bearish trends, you shit your pants for a few weeks in a row. If you start the algo during a bear market, then you only go down, it is never great to start on a negative note. When I test an algo, I like to see profits right away, it shows that it actually works.
Conclusion, if you want to trade on smaller time frames, you should have an algo that does not rely on probabilities of success, but on randomness.