Never expand your timeframe
One of the things that falls in to the category of hoping the market is going to turn in your favor is something that I know I have done in the past. That’s expanding your trading timeframe. Here’s what I mean by that.
Let’s say you entered a long position based on something you say on the daily charts. The market moves south on you and starts moving close to where you’ve placed your stop. A quick look at the weekly chart, though, shows you that really the market could move even lower and still not really alter the longer-term uptrend in prices. You use that as rationalization to lower your stop.
On the face of it, that might not sound like such a bad thing. After all, you’re just trying to use what the market’s telling you is going on, right?
Here’s why doing something like that is a REALLY bad idea.
First of all, any decision you make when you are facing taking a loss should already be very suspect. If you are improvising and not doing what your plan for the trade says you should be doing, chances are your emotions are getting the best of you. It’s the fear of being wrong and the hope that the market will turn around. Those two feelings are not ones good for making solid decisions.
Secondly, when you put that trade on in the first place I assume that you sized it based on the level of risk you were willing to take on the trade. By lowering your stop you just completely changed the risk profile of the position, and in a negative way. Your exposure just increased, potentailly by a lot. That’s not good.
The third thing is what you are doing to your potential risk/reward situation. By loosening your stop you increased your risk, which under some circumstances might be fine. Did you also adjust your profit target, though?
Normally, when you trade in a longer-term timeframe you are looking for bigger price moves. That offsets the increased point or pip risk you take. If you shift from daily chart to weekly chart for your stop, your price target should as well. Most people don’t do this, though, because if the market does turn around they are just so relieved about that, they don’t give any real consideration to the proper upside potential of the trade. For one trade that might not mean much, but when you repeat the process it can really do some damage to your trading stats.
It is absolutely fine to use multiple timeframes in your market analysis and trading. In fact, I encourage you to do so. Understanding the longer-term view can help you make better short-term trades. Just make sure that when you decide on a trade you stay in that timeframe.
Struggling with support & resistance and knowing what the key market levels are? Check out the Price Distribution Analysis methods I use.
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