Page 296 - DCOM507_STOCK_MARKET_OPERATIONS

Unit 14: Currency/Forex Market

Notes

What is the lesson to learn here?
While the trade history above certainly proves the true power of risk reward, we have to
ask ourselves how much better we could do by applying a true edge in the market, like the
edge we get from trading price action setups. When combined with experience and education,
price action trading strategies can certainly provide you with trade setups that give you a
better than 50% probability in the market, assuming you apply discretion and do not
over-trade. So, if we assume we can attain at least a 50% win rate by using simple price
action strategies like the ones that I teach, and we use a risk reward of at least 1 to 2 on
every trade, over a series of 20 trades where we risk $50 per trade, we would make a profit
of $500 ($1000 in winnings – $500 in losses).

So, we know that risk reward strategies work, there is no doubt about that at all; you
randomly enter the market and if you make at least 2 times your risk on your winning
trades, you will likely breakeven or turn a small profit over a series of trades. When we
combine this knowledge of the power of risk to reward with a high-probability edge like
price action, what we have is a professional money management and trading strategy,
which when combined with the proper education and discretion will make money over a
series of at least 20 trades or more.

Professional traders know that their winners have to out-pace their losers to make money,
because most professional traders only win about 50% of the time. If you have no edge in
the market that can get you to the point of winning at least around 50% of your trades, you
are probably going to only breakeven over any series of trades, assuming you still
implement a risk reward of at least 1 to 2. Most traders do not implement risk reward
properly; they take profits of less than 2 times risk which inherently forces them to have
a very high overall winning percentage to make money. By taking a profit of less than 2
times risk, you are basically PURPOSESLY putting the odds against you, because you then
will have to win over 50% of your trades to make money, and most trading strategies do
not give you an edge that will allow you to consistently win over 50% of your trades.
A high quality price action setup allows you to set and forget your trading while still
giving you a higher than 50% chance of winning any given setup. What this means is that
with price action and risk reward you have a nearly stress-free way to trade the market;
you can wait patiently for obvious price action setups that develop from confluent areas
and/or in trending markets, enter a risk reward of 1 to 2, and walk away until the trade is
Contd...

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