As of this writing (9.05pm) the Eur/Usd is trading at 1.2402
I will continue with some more comments on Risk/Reward ratios and Profit/Loss probabilities ( which is also called "Positive Mathematical Expectancy" of a trade) and how it impacts your bottom line.
I had stated at the begining of this thread that on this particular trade the risk/reward ratio was 1:4.5 and my expectations on this trade going in my favour (ie. Profit/loss probability was 65%). This number is based on many years of experience and statistical analysis of the types of price patterns that I have studied. Different patterns have different outcomes.
1) Lets assume that when we enter the market our odds of winning are 50/50 and our r/r is 1:1. This means that over a series of say 100 trades the outcome to the bottom line is going to be neutral (we will not take brokerage into account) - this implies that we have no edge in the market.
2) Now assume that when we enter the market our odds of winning are still 50/50 however our r/r is 1:2. This means that over the same long series of 100 trades we can expect to add 50 = ((50x2)-(50x1)) to our bottom line.
This implies that we have an edge in the market and the chances of success in the markets are very good.
3) Now assume again that when we enter the market our odds of winning are 65/35 and our r/r is 1:4.5. This means that over the same series of 100 trades we can expect to add 257.5 = ((65x4.5)-(35x1)) to the bottom line.
4) And finally assume once again that when we enter the market our odds of winning have reversed and are 35/65 (35 wins against 65 losses) but our r/r is still 1:4.5. This means that over the same series of 100 trades we can expect to add 92.5 = ((35x4.5)-(65x1)). Surprised/confused?
. This actually is true although the number of losses are greater than the number of winning trades - our r/r ratio saves the day for us.
You can try several combinations and the results would be very interesting and enlightening.
So what does this all actually mean:
1) As Tradeji has mentioned today in another thread that to win consistently in the markets a "Trading Edge" is very important.
2) The trading edge can be quite small - but it will give one an advantage over the other market participants.
3) How does one develop a trading edge? - there are several fronts one can work on.
a) Improve the trading methodology - which will give a higher winning probability (more number of winning trades).
b) Improve r/r ratios - which will give higher profit per winning trade than the losses suffered on losing trades.
4) After which one develops a trading plan and stick to the plan and EXECUTE THE PLAN.
5) It is most important to remember that no one single trade should become "very important trade" - this normally spells disaster.
6) Treat trading as a business - you are trading because you want to make money from the markets not give money to the markets (90 -95% traders lose money in the markets!!). A sobering thought.
7) Reading one book on technical/fundamental analysis will help but it will not make you money. A winning trading system for sale is a fools gold and will not make you money. Trading is hard work which involves constant learning.
8) This is business that has the potential to make one very rich - and because of this fact it is also a business which attracts some of the smartest brains on the earth. I know for sure that I am not the smartest in the business - so I just work very hard at understanding what is going on in the markets and learning continuously - and keeping track of what the smart money is doing by reading the price patterns and then try and latch on to on their coat tails to enjoy the ride - if I get shaken off I also know that I have not lost a fortune and I am back again watching them.
More later
Good trading
Nautilus