RISK MANAGEMENT: A CASE FOR THE HIGHER TIMEFRAME

Abstract:
This publication explores the differences between higher timeframes and lower timeframes in trading and delves into how various factors, such as spread, commissions, and news releases, affect these timeframes. Additionally, the concept of price fractality is discussed, highlighting how both higher and lower timeframes exhibit similar patterns despite their apparent distinctions. It is argued that higher timeframes offer certain advantages by mitigating the challenges faced on lower timeframes.

Introduction:
Trading involves analyzing and interpreting price movements to make informed decisions. Traders often utilize different timeframes, each offering unique perspectives on market behavior. This publication aims to examine the distinctions between higher timeframes and lower timeframes, focusing on the impact of spread, commissions, and news releases, while considering the fractal nature of price.

Higher Timeframes:
Higher timeframes, such as daily, weekly, or monthly charts, encompass longer periods and provide a broader view of price movements. These timeframes tend to smooth out market noise and offer a more comprehensive understanding of overall market trends and patterns. Key differences and advantages include:

🔹Reduced impact of spread: Higher timeframes generally exhibit wider price ranges, making the spread a relatively smaller percentage of the overall movement. This can minimize the impact of spreads on trading outcomes.

🔹Lower impact of commissions: Longer timeframes typically result in fewer trades, reducing the frequency of commission charges and their impact on profitability.

🔹Less sensitivity to news releases: Higher timeframes are less susceptible to sudden price fluctuations caused by news releases or economic events. Traders can avoid getting caught in high volatility and erratic price movements.

Lower Timeframes:
Lower timeframes, such as hourly, 15-minute, or 5-minute charts, focus on shorter periods and provide more granular insights into price movements. These timeframes are characterized by faster-paced trading and require different considerations. Key differences and challenges include:

🔹Spread impact: Lower timeframes tend to have smaller price ranges, making the spread a larger percentage of the movement. This can impact profitability, as traders need to overcome the spread before a trade becomes profitable.

🔹Commission sensitivity: Frequent trading on lower timeframes can lead to more commission charges, affecting overall profitability. Traders should consider the impact of commissions on their strategies.

🔹Increased vulnerability to news releases: Lower timeframes are more prone to sudden price movements triggered by news releases. Traders need to be vigilant and manage risks associated with unexpected volatility.

Price Fractality:
Price movements can be argued to be fractal in nature, exhibiting similar patterns at different timeframes. Fractals are self-repeating patterns that emerge at various scales. In trading, this means that the price behavior observed on a higher timeframe can also be found within the price movements on lower timeframes. This suggests that the market's dynamics are consistent across different timeframes.
Despite the similarities in price fractality, higher timeframes offer advantages due to their reduced exposure to certain challenges:

Conclusion:
In conclusion, understanding the differences between higher timeframes and lower timeframes is crucial for traders. While both timeframes exhibit fractal patterns, higher timeframes offer advantages by minimizing the impact of spread, commissions, and news releases.

🔹Smoother trends: Higher timeframes help identify more significant and reliable trends, reducing the impact of noise and false signals prevalent on lower timeframes.

🔹Enhanced risk management: Longer timeframes provide clearer support and resistance levels, enabling better risk assessment and position sizing.

🔹Reduced emotional stress: The slower pace of higher timeframes can help traders avoid impulsive decisions caused by the rapid price movements often seen on lower timeframes.

Conclusion:
In conclusion, understanding the differences between higher timeframes and lower timeframes is crucial for traders. While both timeframes exhibit fractal patterns, higher timeframes offer advantages by minimizing the impact of spread, commissions, and news releases. By adopting a strategic approach that aligns with their trading goals and risk tolerance, traders can harness the benefits of different timeframes and enhance their trading performance.