Actually, the real title of this blog should be the more descriptive: Proportional Time Frame Differential Analysis of FOREX Trade Entry Target Points.

But that expanded title is way, way too long and academic sounding. Regardless of the title, this discussion concerns itself with how to translate static type profit and risk levels established for one time frame onto another time frame.

For example, if you're a short term trader on the 15 minute time frame with an ATR of 10 pips using an 8 pip hard stop, is there a way to calculate that stop point proportionally up onto, say, a daily chart where the ATR is 300 pips? And what value would you have to use then for the hard stop if the ATR on that 15 minute time frame all of a sudden goes from 10 pips to 20 pips?

Of note is that to this post, I have a companion video of the same title that puts all of this together from a different view point.

If you've come from watching that video, then press on here. However, if this is your starting point, I might suggest that you read through this before watching the video. Or, if you want, you can skip to the bottom of this post to watch that video now.

The short answer to the above questions of proportional adjustment is: Sure you can do this, but do you really want to approach things this way?

I don't think you do, but let's go through the exercise so that at least you can see how you could do this. Then, you can decide if you want to follow that, or tweak it in some similar way to your own specifications. Please bear in mind that this post is certainly slanted to the way that I think about it.

This material is predominately a specific process of trade entry analysis that is applicable to the way that I trade on the short term charts.

By understanding how I approach trading in the manner I do, you'll have some context as to why this might be something you may want to incorporate into your own process.

As a short term trader, I use the 15 minute time frame chart to determine both price action directional bias, and for all of my trade entry analysis, i.e. profit targets, and risk management. I use the 5 minute chart for trade execution timing, and (gad, yes) the 5 second time frame for some parts of trade management.

Being a short term trader, for me, provides a highly controlled risk environment, as well as a whole lot less data analysis for all trade decisions. That's a good thing, because short term, day traders make many trades a day, and go flat at the end of the day.

We don't do carry trades unless they are not only well in the money, but also have an inordinately high probability of continuing to move in the current direction.

Specific to me is that, based on certain values of ATR, I First do not enter a trade unless there is a high probability of price moving at least 20 pips before there are any past price action structural markers. Second, for simplicity of risk control I set a static 8 pip hard stop immediately after I enter a trade.

The two conditions I'd like to cover in this exercise are:

• Is there a way to calculate that stop point proportionally up onto, say, a daily chart where the ATR is 300 pips?
• What value would you have to use then for the hard stop if the ATR on that 15 minute time frame all of a sudden goes from 10 pips to 20 pips?

The following chart displays the specific base process I use contrasted with the ATR situation on different time frames:

And the following chart shows in the first section the translation of setting the 8 pip stop on the 15 minute trade execution chart to that of what it should proportionally be at 240 pips on the weekly execution chart as 80% of that ATR.

The second section shows the situation of changing the stop value of 8 pips on the 15 minute, 10 pip ATR to a 16 pip stop when the ATR changes to 20 pips.

Both charts also show the proportional adjustments to the profit target under those changes.

The 'factor' in the Profit Target column represents a profit target that's approximately 2 times the value of the current ATR, and the 80% factor in the Risk column means that the risk take on the trade is basically 80% of the time frame's ATR.

These are not calculated values!

The factors are approximates of what I set as my profit target and stop from other analysis which I did. I personally have no interest or use for what these 'factors' are. I don't use them. They are simply an empirical statement of the relationships that occur in those 15 minute, 5 minute, and 5 second time frames. I did not calculate those values from those relationships; those relationship calculations simply demonstrate the relationship between elements of those values which I just arbitrarily set. Please be clear on that.

The only reason that I show them is for purposes of transposing the magnitudes of the resulting values from short term charts up onto long term charts, as shown.

And thus, looking at these charts, I hope you can see why I made the comment about making proportional changes like this: "Sure you can do this, but do you really want to approach things this way?"

Regardless of if you are a short or long term trader, risk control — not risk management as they are two different processes — is of primary concern. I often quote Warren Buffett on this:

Warren Buffett's Two Rules of Investing

• Rule 1: Don't lose money.
• Rule 2: See Rule 1.

Not to beat this to death, but I need to make a definitional distinction here:

Risk control is what you do at trade entry, whereas risk management is what you do after you change that initial stop order to a limit order to close the trade.

Though in general conversation it's all really just referred to as risk management, I needed to make the distinction here for this discussion of trade entry analysis to make sure you understand the significance of the issue I'm discussing.

Trade entry is such a critical thing to get right because, regardless of your probabilistic analysis of price moving in your desired direction: as soon as you hit bid/ask, it's really 50/50, jump-ball.

As a short term trader, I must simplify trade entry analysis. I can not afford to cloud my view of price action in real time with the dual issues of risk control with that of probability assessment of price moving correctly in my favor.

How is this dealt with?

My trading approach

In my case, I totally eliminate the entire issue of risk control analysis by having a static 8 pip loss. This leaves me free every time I look at a trade entry situation to focus on the profit target analysis.

When I trade, I try to lock at least 5 pips by risk managing my stop to protect that 5 pips after price moves 8 pips in my favor.

You might wonder if I don't get stopped out a lot. I don't.

I have a pretty good win to loss ratio because I wait for a good entry signal, and because I lock 5 pips profit as soon as I'm at least 8 pips to the good. I do this by either peeling off part of the position at 5 pips, and moving the stop to break even, or just pulling the stop up, and letting things run.

At issue here is that static 8 pip stop — as well as my projected profit target — are both determined by me, and not some calculation that I do. I specifically chose those levels because of the parameters of the currency pair and time frames that I do my analysis and trading on made them "reasonable" to me.

Thus, the implication is: what happens if those parameters change?

And that's what this post's initial conditions to resolve were:

• Is there a way to calculate that stop point proportionally up onto, say, a daily chart where the ATR is 300 pips?
• What value would you have to use then for the hard stop if the ATR on that 15 minute time frame all of a sudden goes from 10 pips to 20 pips?

The reason that I made the statement: "Sure you can do this, but do you really want to approach things this way?" as to if I could do those types of proportionality calculations was exactly because my parameters were not calculated, but rather stated.

The graph Proportional Time Frame Differential Analysis clearly shows that translating my 8 pip stop on the 15 minute time frame up onto the weekly time frame, though proportional to the ATRs at 240 pips, is just a lot of risk. Too much risk.

In fact, 240 pips risk against that 'projected' 600 pip profit target is 40%! Best practices would limit risk to 2% of bank. In that case, you'd need a account size of $12,000.

So, you couldn't even trade a mini lot against that scenario! And even if you did, with 5% margin requirement of, say on average $500, a $240 hit against the remaining $500 of your best practices $1,000 bank is a 50% loss. Heck, $240 is a straight up 24% loss on the entire account!

You couldn't even trade that scenario with a full lot account size of $10,000 because your loss is still 'proportional' at $2,400. You'd need an account size of $120,000 to make that trade. Good luck.

To get around this, educational resources tell you that the only way you can make a trade like this with a 240 pip stop is to either reduce the risk from 240 pips to 20 pips (i.e. 20 pips at $10 per pip is a 2% risk against a $10,000 account), or reduce your lot size from 1 full lot at $10 per pip to trade 1 mini lot at $1 per pip.

Really?

Neither one of those practices make any sense to me. In the first case of reducing the risk from 240 pips to 20 pips is beyond reasonable if you're shooting for a 600 pip profit target as that 20 pips will be hit quickly while you wait for price to ramble along up 600 pips. And dropping down to trade mini lots at $1 per pip with a $10,000 bank just does not put the power of that $10,000 to work for you.

So, can you transpose statically created profit target and stop levels onto different time frames or currency pairs?

Again: Yes, you can. However, in order to retain the proportionality of those levels you'd have to have a full lot capable account size and trade mini lots. That just doesn't make sense. Well... to me it doesn't make sense.

So, what can you do?

Well, if you're a long term trader it's going to be really tough for you to look at this through the lens of a short term trader's view. Let me clarify this view for you just a bit....

Even though I'm happy to settle out the day with a 3 pip profit does not mean that if that dog wants to run that I won't follow as far as it goes.

If price is on a rip, then why would I cut at 20 pips, or 200? I'll trail my stop until I see price start to stall, and just exit when it comes back against me 8 pips.

After all: if I exit on an 8 pip retracement, but price turns around and looks like it can continue forward, I can always just-reenter-the-trade....

If you're a long term trader, you're probably thinking that 8 pips is not a lot of real estate to let price 'breathe', to move.

Well, look: you're just conditioned to take deep retracements. The basis of a long term trade is that eventually price will swing back out of that retracement, and continue on to hit that 600 pip profit target.

You are absolutely correct in your thinking. But please bear in mind that from my view point as a short term trader,

My primary objective as a trader is to quantify my risk such that I know immediately if I'm correct or not in my trade entry, and in my trade management.

When I am correct, I do not want to wait to have to be faced with a decision process as to whether the retracement is temporary or a full reversal. I will take whatever the trade offers me until I see the potential for a reversal, and then I exit my position.

We're playing the same game, just on a little different field.

And that's why a long term trader may have difficulty playing on a short term field, but a short term trader has no problem playing on a long term field.

What this means is that: When I'm evaluating a potential profit target on whatever time frame or currency pair I'm trading,

Playing Field Agnostic Trading

I only look to assure myself with a high degree of probability that price will go at least 20 pips before there's a potential retracement event.

If price goes further, I'll follow as far as it goes.

Because I'm only looking for a potential profit target of 20 pips:

• That 20 pips should be an easily obtainable goal if my probability entry analysis has been correct.
• Even if it doesn't make 20 pips, I'm happy to close with just 3 pips because 3 pips a day is over a 60% annual return.
• My static 8 pip hard stop is close enough to give me notice that I was wrong in my trade, and I can exit with minimal damage to my account.

And because I only use a static 8 pip hard stop:

• That stop is just large enough to provide price some breathing room to make that 20 pip anticipated move.
• That static 8 pip hard stop combined with my 20 pip profit target means that my reward to risk ratio of 2.5 puts me in just super shape.

Video: FOREX Trade Entry Time Frame Differential Analysis