The Authority’ on Price Action Trading. In 2016, Nial won the Million Dollar Trader Competition. 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.
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. 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. 3656, one pip above the high, the entry is a break of the low, so 1. 3611 is our entry level, one pip below the low. 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. 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. The best way to do this is to mark your risk and reward levels just as described above, but instead of actually entering an order for your reward levels, you leave the trade open, meaning you don’t have a set exit at your pre-defined reward levels. 1 times or 2 times your risk.
The daily AUDUSD chart below shows an inside bar setup that occurred back in mid-September of this year when the AUDUSD was in the midst of an uptrend. It looks like the market hit 0. 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. It is really great and fantastic article. These writings have the power to change one’s mindset completely and can turn he or she to a big profitable trader. I have one small question that all these lessons must be applicable to Equity stocks equally. Or any change in needed there?
Mmmm nice one I will have a look at it again. I like u to send me simple useful tools that can aid my success in Fx trade. Simple, logical and easy to comprehend. 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.