Saturday, July 7, 2012

Lower timeframes = trend-friendly?

I've been spending the last few weeks doing more backtesting, per usual. In the last week I've focused on Bill Williams' fractals, moving averages and trendlines.

Anyway, I decided to focus my backtests on the 4HR chart instead of the daily and asked myself if greater profit can be found trading trends on lower timeframes?

To answer this question, I decided to find the average candle size for the AUDUSD on the 4HR and daily timeframe from 2001 to mid-2012, which were approximately 47 pips and 107 pips. I then found the low and high for the AUDUSD during this period, which were 0.4818 and 1.1078. The range between these two numbers is 6260 pips.

This is just an elementary exercise. On the daily timeframe, this range is equal to 58.5 average-sized daily candles (6260 / 107 = 58.5). On the 4HR timeframe, this is equal to 133.2 average-size 4HR candles (6260 / 47 = 133.2).

So if you managed to perfectly pick the trend from bottom to top, you'd make over double on the 4HR chart than the daily chart. The same logic will apply to the 1HR and lower timecharts. Of course, this will be balanced by the relatively higher proportion of spread that you will pay as you trade the lower timeframes, plus the "noise" that'll become more prevalent.

So if you are trading trends, you might examine the possibility of trading the 4HR or 1HR charts, and to stick to the major currency pairs to keep your spread to a minimum. The daily charts seem to be more suited for mean-reverting or range-friendly systems.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.