So far we know the DIRECTION of the Price Action and have estimated the REWARD it represents.
Now we want to determine Market’s Condition so we can use the right Trading Strategy for it and we also want to find the Highest Time-Frame we can Enter from, placing our Stop-Loss at a level which is immune to spikes and also keeps the RISK as low as we can take it. So our RISK determines the Time-Frame we will Enter from. The reason we want to enter from the highest possible Time-Frame with the lowest possible Risk, is that higher Time-Frames are more reliable.
***Important TIP to remember regarding the choice of Time-Frame : we start from DAILY TF and go down first checking which is the ideal SL placement level depending on the Signifcant Support/Resistance Levels and then measuring the pips-distance and checking if it is equal or lower than the Risk we can take. It’s NEVER the other way around !
Below are the Market’s Conditions we may see on DAILY TF :
#1 Range-Bound Market : when price is moving in a ZIG-ZAG MODE within a Range
#2 Trending Market : when price is moving UP making Higher Highs and Higher Lows or DOWN making Lower Lows and Lower Highs
#3 Consolidating Market : when price is in a stasis moving sideways in a horizontal mode maintaining the same price level
STEP #4 Rules :
Ideally we want to enter from the highest Time-Frame where we can place our SL without exceeding our RISK limits. So going down to smaller Time-Frames till we spot the one where we can enter from with minimum RISK looks good but isn’t the best practice because smaller Time-Frames have lower reliability and higher volatility especially the kind of unexpected Spikes that can hit our SL. So it is preferable to not take a trade at all and check another pair, if we can’t spot a nice Entry on a relatively High Time-Frame.
When looking for our SL placement in order to determine if we can take the trade from a Time-Frame or not, our RISK is the last thought that should cross our mind. FIRST come Market’s dynamics and price action fluctuation. Then comes the measurement of the RISK. If it is within our limits, we take the trade. If it is higher, we drop it without second thought.
A trick we can use in order to enter from a higher Time-Frame -such as Daily- minimizing RISK, is the candlestick-per-candlestick approach. We want to ENTER with explosive momentum. That means, we want to see a strong candlestick to the new direction and the next one opening to the same direction with all our tools confirming it. We place our SL just below/above the opening of the strong candlestick and ENTER when the next opens.