I have mentioned risk reward time and time again in how it is crucial to making money in Forex yet so many people keep doing the same thing over and over, they keep risking more than what they should and thus over time there account gets smaller and smaller.
If you are doing this then you are not alone, in fact if you do this you are in the majority pool and not the minority pool. So let’s see how we can fix that..
First off, let me first say one thing. In Forex the initial probability is 50 / 50 if one does not look at the charts and randomly enters. I think everyone can agree there, no matter how much or how little one knows in this business price has to move either up or down 50% of the time, in a way like a coin toss.. What changes these odds is by looking at the charts and evaluating movements. ( PA in a way )
Elements such as trend increase that probability as well by around 10% and then elements such as understanding strong resistance or support increase it again by around 15% again.. This all round makes a trader have a good 75% success ratio. My secret formula of using the weekly charts properly increases your probability as well. Weekly understanding is a whole other topic, because it is so big, so stay tuned there, I will get to that topic soon.
By assessing these elements one can see how one can achieve a 80% success rate..
However there is no rewards for how good you are in this business, in reality it is a profit business so only profits should matter in the end.
Time to leave ego at the door and except that one..
Now let’s take a look at the average trader, meet average Joe, he places a trade, puts a stop loss at 100 pips and then later comes back and takes profit at 20 pips.. Well done Joe, he does that 5 times in a row and then oh no, the market moves against him.. He has two choices, he runs and hides behind the sofa or he extends his stop loss and uses equity to protect him or he takes it like the man Joe is and takes a 100 pip loss..
Okay so what is wrong with this view or picture, well Joe did 5 trades each 20 pip profit, but then when the market changed he lost the whole lot on that one.
- – 100
– Overall zero profit, in fact a loss if one counts spread.
This is so common, that is why many call him break even Joe. Now let me take it one step further, say Joe had two losses which is 200 pip loss and four wins, he would be doing what? Losing money. This is so common as well.
Now, what if Joe took his knowledge and left ego at the door and just looked for 2 to 1 risk reward or more trades.. Hard to do, I know, this is more like what Joe’s account would look like if he can handle the loss runs doing this. He would win about 60% to 65% of all trades, I know that sounds lower but actually that is around the figure of the highest earners in Forex or Stock trading.
So now break even Joe has a plan, he marks his risk on the chart and enters focused on risk first, he knows now that if he loses half his trades in a bad week that he still makes profit, that is his edge he uses to keep cool, even though deep inside he is still sweating on each loss, this is the hardest lesson to learn in all forms of trading but now Joe is ready to take a stand.
Now let’s say Joe at a modest rate is not the best at this, he is average at how he trades and he knows this. No one can be right 100% of the time and now average Joe is becoming less average because he knows this simple bit of math, in fact he is becoming a more successful trader just by understanding this. This is what is often referred to as tipping the scales in your favor, knowledge plus math.
He knows now that if every good trade he sees and he trades if half goes to his target or to at least break even he is making money, maths does not lie and he knows this. He even knows that he should get winning streaks and losing streaks, but that math average is in his favor either way.
This is how it would look like in a nutshell: ( or something similar )
- 50 Loss
- 100 Win
- 50 Loss
- 100 Win
- 50 Loss
- 50 Loss
- 150 Win
– Profit of 150 pips total, with 4 losses and 3 wins.. That is profit, even with more losses than wins.
… And so forth, I think you get my point, see the aspect above where two losses happen in a row, this is where it divides the trader into a real trader, can you as a person except that double loss in a row..? And if so, then congratulations, because that is key to your survival here..
Now, What Happens If Joe Knows Price Action..? Well that is where everything changes, he not only can except losses but also is now trading the highest probability as well. It is like maths on your side, plus candle and technical knowledge. Well done Joe. Everyone should give him a round of applause.
Video Case Study
Okay so, enough talk yeah, it is time for me to put my money where my mouth is so to speak, in the next couple of weeks I will do just that, I will do a video case study of at least 20 trades captured on video, no funny business using the at least 2 to 1 risk reward money management system, sometimes 3 to 1. Plus I will try to break even each time a trade breaks 35 to 40 pips my way which will increase our success as well. This is only when i notice though okay.
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