He has a monthly readership of , traders and has taught over 20, students. If you were stranded on a desert island and somehow had access to the internet, a computer, and electricity, and you could only have one Forex trading educational article to read, this would be the article you would want to have…. A simple fact of Forex trading is that it is a game of probabilities, those traders who learn to view and think about trade setups in terms of risk to reward, are the ones who usually end up making consistent money in the Forex market.
There is something to be said for developing your discretionary trading skills, as having a sharpened sense for spotting well defined trade setups at the right place and time is definitely a necessary ingredient to successful trading. However, it is possible to make consistent money even if your discretionary trade setup identification skills are not fully matured yet.
The first thing that all traders should do upon spotting a price action setup, or any trade setup, is calculate the risk they will have to take on in order to give the setup a realistic chance at working out. Traders often make one or two mistakes when it comes to determining risk; they either define the reward first, which is a mistake born out of greed, or they put a stop loss on the setup that is much too close to the entry to give the trade a chance at working out.
When learning to think in probabilities and to view the market in terms of risk to reward, it is necessary to calculate the risk on a trade setup first, then you can calculate the reward as a multiple of the amount you have at risk. By concentrating on the risk first, instead of the reward, you are making yourself more aware of the risk involved on each trade setup, instead of becoming fixated on how big of a reward you might make, as many traders do.
The next thing to do after you have identified a high-quality trade setup and marked the risk level on your chart, is to mark the reward levels as multiples of your risk. You want to draw a line at 1 times your risk, 2 times your risk, and 3 times your risk. First, we identify a high-quality price action trading setup, in the chart below we are looking at the 1hr chart of the EURUSD from this week.
A quality 1hr pin bar sell signal formed at a confluent intra-day resistance level and in the direction of the bearish momentum on the daily chart. Next, we mark our risk level for this setup, in this case the risk is the distance from the low to the high of the pin bar, so we place a stop loss at 1.
Since you can trade various numbers of lots per pip, your actual risk is not calculated in pips, but in dollars, many traders make this mistake. Remember; always calculate your risk and reward in dollars, not in pips, only use pips to mark the risk and reward levels on your charts.
Now we can use this measure of 45 pips to mark our 1, 2, and 3 times risk multiples. Since our stop loss distance is 45 pips, we subtract the 1, 2, and 3 multiples of 45 from our entry point of 1. This setup obviously worked out quite nicely as all three risk multiples got hit, for a reward of 1 to 3. It is worth noting that trade setups on the smaller time frames are more likely to hit larger risk multiples since your stop loss will usually be tighter than it will be on a higher time frame.
The trade is now set up, time to let the market get to work. In the chart below we are looking the daily Silver market, we can see a quality pin bar fakey combo setup formed with the dominant bullish market momentum. We first marked our risk distance which was 1. Instead, once the market moves in your favor, you use your pre-defined reward levels to trail your stop loss to, thus leaving the trade open and giving yourself a shot at greater profits, while still locking in some profit and lessening risk.
Many traders will simply keep their stop 1R multiple away, meaning if you are up 1 to 2, you trail your stop up to lock on 1 times your risk, if the market than moves 1 to 3 you trail your stop up to lock in 2 times your risk.
This is a solid trailing technique because you are securing profits while at the same time leaving the trade open for a possibility at it running further in your favor. This technique is best used in strong trends. It looks like the market hit 0. If you moved up to lock in 3R right away you would have got stopped out at 3R by the pin bar on September 5th, had you not locked in 3R you could have eventually made 4 or 5R.
However, many traders mess it up or limit its power by meddling in their trades once they are live, usually this means they take less than a 1 to 2 profit, and then enter another trade that is lower-probability, and maybe take a loss. Once you start this game of meddling with your trades and interfering with the power of risk reward scenarios, you really put limits on what you can achieve as a forex trader.
The lesson to be learned from this article is that you can make still money in the forex markets even if you lose far more trades than you win , IF you understand and properly implement risk to reward scenarios on every single trade you take.
You must combine this knowledge of risk to reward with a plethora of self discipline, you must understand that you cannot waver or second guess yourself, if you are trading a solid trading strategy like price action combined with risk reward knowledge and self-discipline, you have the potential to be an unstoppable trader. To learn more about price action trading and risk to reward, check out some of the other cool parts of my website and my price action trading course.
Any questions or feedback? It is really great and fantastic article. Really thank you very much. I have one small question that all these lessons must be applicable to Equity stocks equally. Or any change in needed there? I like u to send me simple useful tools that can aid my success in Fx trade. Thank u for your works. To my amazement, the one thing that was missing is I was not applying it. Yes I started out with good intention but would always go back and get out of the trade early.
Yes, Nial you must do it the correct way if you want it to work. Do you think will it be profitable on long term? I will be glade to hear your opinion.
Another very good article Nial, thanks for sharing your valuable knoledge. You are a truely good trader and teacher. One of the most helpful articles on your site.
I gave it a quick skim a while ago, finally returned to it today and gave it a closer look. Nial, thanks, as always, a great article. I have a comment and would be happy to hear your view on this. At the same time, we need to be clear that if our TP level is further away to get a higher R , then the probability of hitting the TP gets smaller! Question is where the optimum lies. I guess it will depend on individual trader psychology, the market situation, as well as a given setup.
To calculate the risk first and use that to multiply reward makes all the sense of a prudent plan. I greatly appreciate the detail of the content you provide freely and on such a wide variety of issues. Tempted to sing-up for the price action course however, I am still digesting the free content.
Thank-you very much please know that your information is first rate and so worth the time!!!! Awesome Nial Great stuff. This is definitely the most important fact one needs to know in forex.
Thanks so much for your willingness to share your wealth of knowledge, and for being such a fabulous teacher. I have watched almost all of your free videos and read most of your articles numerous times in the past week. This article was the most valuable of them all to me. Hi Nial, I am a beginner in trading with a target to become the jack of the trade. As my initial effort, i extensively googled for information on how to trade and what is the logic and strategy behind success.
I got lots of manuals and articles from many people which made me feel that i am trying to climb the Mt. I could feel the confidence within me filling. Believe me, I am kind of addicted to your articles that i read the same articles over and over because each time i read them i can see a smile of confidence on my face. Anyway, i still do have a number of queries. I will be registering to your full course on how to trade very soon.
So, do expect a mail from me. I have always found this site a useful resource for my forex research. Thank you so much for what you are doing here. Such an important part of trading often overshadowed by thinking of profits only,Failure to manage risk successfully was the cause of trading account wipeout for me in earlier trading attempts. This is perhaps the most important thing in trading that you need to truly understand in order to have a consistently profitable trading career.
In any endeavour in life the successful people always understand the risk they are prepared to take in order to attain an expected amount of reward.
This is something that will just become second nature once you start applying it and will never again trade without carefuly considering it. Hi Nial, reading from you makes it feel one can go all the way. I also look forward to how I will possess some of your training courses and forex trading tools.
Mr Nial Thank you for your valuable lessons, I am getting near it and make me more comfortable in trading. Nial thanks for that lesson its so much easier to grasp when presented in such a simple manner. The first trade with the stoploss 1. I know from experience, that it is absolutely impossible to stay concentrated nonstop even for 4 hours. Or is there a possibility to manage this without a loss, without the necessity to stay in front of the screen?
You dont have to stay in front of the screen the whole time. And I also have a Tool that helps manage trades I am launching that to members soon also I trade large size, this is just for examples sake. Once again, A superb topic which I agree with Mr. Nial, very helpful and valuable thoughts.
This is what put me in the winning side as before I was breakeven or bust. I have learned to curb my desire to see how much I can make to making sure I check the risk first then reward 2nd. And waiting for a high probability trade set up is key as you mention throughout your course. Thanks Nial, great article to reinspire me after a break fromt trading. Thanks also to Larry for highlighting the articles existence this morning.
Hi Nial Thanks for your lesson they are great ideas, on your sell would the stop be taken out on one pip if it reached the same hight of the previous pin bar? I use limits with my trailing stops. Nial — very clear and forceful information, complemented by the visual from the charts.
I stepped back to understand more fully self discipline and emotional control. Indeed this is the third god in the trinity of forex.More...