I ran a trading experiment over the past two weeks to demonstrate a point to anyone who might be hesitant about the effectiveness of risk reward paired with price action trading systems. This post will take you on a tour inside my head and hopefully convince you that all you need to do to become a consistently winning forex trader is to implement the right risk-reward strategies and be willing to study a high probability trading method like price action. Reading this essay and beginning to understand the ideas covered will open your eyes.
I made the decision to arbitrarily enter 20 transactions in the currency pair EURUSD, GBPUSD and AUDUSD over the past two weeks in a demo account in order to illustrate and highlight the potential for risk-return first. When entering the market, no method or plan of any kind was applied, and no price action settings were used. The rules called for entering one of the three currency pairs above a total of 20 times in ten trading days with a stop loss of 50 pips and a target of 100 pips, resulting in a risk ratio of 2 on each setup.
This experiment was designed to demonstrate the effectiveness of risk reward, as well as the effectiveness of price action trading tactics when combined with risk reward. A little profit was made after randomly entering 20 times with a risk reward of 1 to 2 after losing 12 of the previous 20 transactions, according to my data. As you can see from the trade history below, this random entry model paired with a 1 to 2 risk reward still gained roughly $200, this with no edge applied at all. This implies that my winning rate for this series of trades was 40%, meaning that I lost on 60% of the deals and won on only 40%.
What can we learn from this in forex?
While the forex trading history presented above undoubtedly demonstrates the true potential of risk reward, we must consider how much better we can do if we use a real competitive advantage, such as the one we gain from price action forex trading setups.
If you are careful and don’t overdo your forex trading, price action trading systems can definitely give you forex trading setups that give you a better than 50% probability in the market when combined with forex market knowledge and experience.
So, over a period of 20 trades where a forex trader is risking $50 per trade, and we assume he can make at least a 50% win rate using direct price action methods like the ones he teaches, we use a forex risk return of at least 1 to 2, A profit of $500 will bring in $1000 in profits – $500 in losses.
Therefore, there is no doubt that the Forex risk and reward techniques are effective; If you enter the forex market randomly and make at least twice as much on your successful forex trades as you risked, you are likely to break even or make a small profit on a number of forex trades.
If you have a professional forex trading and money management strategy when we combine this understanding of the power of risk and reward with a high probability advantage like price action in the forex market. When used with proper education and good trade judgment, this strategy will generate profits at least 20 trades and possibly more.
Since most professional forex traders only profit about 50% of the time, they realize that the winners must outperform the losers in order to make a profit. If you are still using a minimum risk reward of 1 to 2 and you have no market advantage that can help you win at least 50% of your trades, you will probably break even with any series of trades. The majority of traders do not properly balance risk and reward; They earn less than twice the risk, which by their nature requires them to have a very high payout ratio in order to make a profit.
In the event that you take profit less than twice the risk, you are basically increasing the odds against yourself because then you will need to win more trades than you lose in order to break even, and most forex trading strategies do not give you an advantage that will enable you to do this.
When in the forex market you find a few losing trades or a few winning forex trades, it is important to maintain your composure and avoid feeling depressed or overconfident. What happens if eight out of twenty trades end with a loss? Have you noticed that a trader lost 9 consecutive trades before making a series of winning trades when you look at the results of his trading experience? You will find that trading involves risks and rewards, and sometimes you will face a series of losses or winners.
However, you cannot let this affect your forex trading strategy; Instead, you should maintain a long-term perspective and keep in mind that your advantage will eventually come into play.
The secret and the formula for success is getting the right training
The biggest factor that can affect your success in forex trading is whether or not you are aware of your advantages and when to trade them, apart from your ability to manage your emotions and your ability to constantly maintain the self-discipline necessary to avoid using excessive leverage or trading, as well as implementing Appropriate risk return on every trade.
In a high probability forex trading style like price action, this is where a good deal trade education comes in. For years, a trader has profitably traded the forex market using live and robust market price action setups. In the forex trading course, you will find a demonstration of exactly how other forex traders experience and how they trade. In addition to providing you with trading technology, the forex course and lessons also explain when a forex trader should apply the approach and what the forex market should look like before entering into a forex trade.