What about managing the trade better – breakeven when at +10 pips?
A Case Study of Random Entry & Risk Reward
Over the last two weeks I have conducted a trading experiment in order to prove a point to anyone out there who might be in doubt of the power of risk reward combined with price action trading strategies.
This article will take you on a journey into my mind and will hopefully prove to you that if you simply implement proper risk reward and have a willingness to learn a high probability trading strategy like price action, you have all the ingredients to become a consistently profitable forex trader.
This article will open your eyes, I suggest you read it, start to learn about the concepts discussed.
In order to first demonstrate and prove the power of risk reward, I decided to randomly enter 20 trades over the last 2 weeks in the EURUSD, GBPUSD, and AUDUSD on a demo account. No price action setups were used, nor was there any method or strategy of any kind implemented when entering the market.
The parameters were simply to enter one of the above three currency pairs a total of 20 times within 10 trading days using a stop loss of 50 pips and a target of 100 pips for each trade, making a risk reward of 1 to 2 on every setup. I did not “mess” with any trade once it was entered, I employed pure set and forget forex trading in this experiment; I simply entered and then let the market do its thing, in order to prove the power of risk reward. (Note, the 20th trade was at breakeven at the time of this writing and I did not have time to wait for it to close out, I counted it as a winner, I will update this article if it ends up becoming a loser when it closes, although this will not change any of the implications or insights of this article.)
While this experiment was meant to prove the power of risk reward, it was also meant to prove the power of price action trading strategies combined with risk reward.
My results showed a small profit after entering randomly 20 times with a risk reward of 1 to 2 on every trade, this after having lost 12 out of 20 trades. This means my winning percentage for this series of trades was 40%, so I lost on 60% of the trades and won on only 40% as you can see by the trade history below , this random entry model combined with a 1 to 2 risk reward still profited about $200, this with no edge applied at all.
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.
2R is better though, right?
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 closed.
If you actually do this with discipline, by only taking obvious price action setups and rigidly implementing a risk reward of at last 1 to 2, you will become profitable over a series of trades.
The key is to not get discouraged if you hit a few losers or become over-confident if you hit a few winners. What if you lose on the first 8 trades out of 20? Look at the results of my trading experiment above; did you notice that I lost on 9 trades in a row before hitting a series of winners?
Trading Random: The Wipe Out Trade (Why it Works)
This is called trading, and sometimes you will hit a string of losers or a string of winners, but you can’t let this influence your forex trading plan, you have to have a longer-term outlook and remind yourself that your edge, combined with risk reward, needs time to play out.
Obtaining the proper training is the key.
Other than being able to control your emotions and remaining disciplined enough on a consistent basis to not over-leverage or over-trade and implement proper risk reward on every trade, the biggest variable that can influence your trading success is whether or not you know what your edge is and when you should trade it.
This is where proper forex trading education on a high-probability trading strategy like price action comes in.
I have been successfully using simple yet effective price action setups to trade the markets now for years, and I teach other traders exactly how I trade in my forex trading course.
My course and it’s teachings not only give you a trading strategy, but it shows you when to use the strategy and what the market should look like before you enter.
When you combine my price action setups with a thorough knowledge of risk reward implementation and a mastery of trading plain vanilla price charts, you will begin to think like a professional trader. Pro traders see the market in a completely different way than amateurs do; they do not over complicate anything.
First they check the market to see if their trading edge is present; if it is not present then they leave the computer or not look at the charts for a period of time, typically at least 4 hours.
Random Trading is the Best
If their trading edge is present, they will then move on to the next factor to check; whether or not a risk reward of at least 1 to 2 is logically attainable. If a risk reward of 1 to 2 is attainable then they enter the trade and walk away, that’s it. The reason a professional trader thinks and trades like this is because they don’t get attached to any one trade; they know that each trade is just one out of a series of many that they must take in order to see their edge play out.
Amateur traders get caught up on each trade; they react to the emotion of each loser or winner because they simply cannot see the forest for the trees, typically due to a lack of experience and insight.
My trading course and price action trader’s community gives you the insight you need to become a successful discretionary price action trader, the experience is something you must develop on your own from the tools and education that I provide.
When you combine the price action and risk reward strategies that I teach with a healthy dose of self-discipline and trading experience, there is virtually nothing that can stand in your way except your own lack of self-control. If you would like to learn more about how I trade the market with price action setups and risk reward scenarios, please check out my price action forex trading course.
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About Nial FullerNial Fuller is a Professional Trader & Author who is considered ‘The Authority’ on Price Action Trading.
He has a monthly readership of 250,000+ traders and has taught 20,000+ students since 2008.
In 2016, Nial won the Million Dollar Trader Competition. Checkout Nial's Professional Trading Course here.