Original subtitles

Okay folks.

Welcome back.

This is the fourth installment of month.

Two of the ICT mentorship, where we specifically talking about why losing on

trades will affect your profitability.

What trading with fear of taking losses actually does to your trading

Mustang concerned about taking a loss promotes, fear based decision made.

Equity is managed by traders that cannot take a loss can't profit.

Long-term

losing is inevitable.

Fear-based decision-making keeps focus on the adverse.

Finally fear-based decision-making fosters trade paralysis, or

inability to execute efficient.

Yeah.

Now why profits are achievable despite taking reasonable losses, the

professional equity manager understands that losses are costs of doing business.

Using sound equity management, and high probability setups

yield, handsome percent returns.

Trading scenarios that encourage potential three to one reward ratios provide initial

foundation only defining trade setups.

That frame five to one reward to risk or more efficiently cover losses.

Okay folks, we're going to give a brief overview on framing, a trade, just

for the context of this discussion.

Looking at this sample size of data, as it relates to price action, really

referring to a specific concept, known as market set up and framing

the risk to reward multiples.

Obviously we're going to use a standard in my repertoire devotion.

As you can see here, the market returns to a previous institutional area

of buying noted by the down candle prior to the previous rally higher

by noting the down candle or the bullet shorter block high to

open price defines the fair value gap or most probable support.

Now, specifically inside of that retracement into the water block, there's

a mean threshold and a hypothetical long entry on the secondary Bush or block.

What I'm going to refer to is this down candle here, the middle

of that candle, where are we using that as a mean threshold?

In other words, we don't want to see.

Violated on a closing basis

using 20 pips as the trade stop loss, easily frames reward round-tables of

three to one reward to risk and five to one reward to risk or even higher

Nudie and old high 20 pips above.

It gives us a nice objective above where price would be retraining.

No, having a simple trade ID.

Based on the things that we taught in September on what to focus

on or what you should be focused on right now in price action.

Let's take a look at some things regarding those setups and how we can

frame good reward multiples, um, how we can frame the ideas and justify why

taking, losing trades doesn't really, or shouldn't have that much of a

impact on your long-term profitability.

We're going to assume that we're using a hypothetical account size

of $5,000, and we're gonna start with it low accuracy rate of 30%.

That means that you're losing 70% of the time.

Me looking for trades debt, our reward, the risk ratio of three to one.

That means we're hoping to make or willing to hold on to a trade, to pay

out $3 gained for every $1 that we risk.

We're risking on each trade.

1% of our $5,000 account because we're risking 1% and we're looking

for a yield of three to one reward to risk our average wind wind trade.

It should be $150 and our average loss should be $50 or 1%.

We're gonna be focusing on a sample set of 10 trades.

Amarillo say that 30% of those 10 trades are winners and obviously 70% would be

losing trades out of those 10 trades.

We are assuming that three wins in 10 trades and seven losses in 10 trades.

The average profit again is 150.

Yeah.

And the average loss again is $50 is up total for the three wins at an

average profit of $150 would bring us to a $450 winning basis on the three

trades out of 10 that were winners.

And it's up total for the losses would equate to $350 or seven

times 50 hours over an average.

Even in this low accuracy rate with a multiple of three to one, you still can

marginally eke out in net positive profit.

It's not much.

And to look at that, it doesn't seem like anyone would be

terribly excited about that.

But if you were doing 10 trades over the course of a day,

And you needed the 2% return.

I can tell you that is an absolutely amazing return for managed funds.

So if you're not going to be trading your own capital, or if you're aspiring to be a

trader that manages other people's money.

So again, 2% while that's not terribly impressive on a grand scheme of things,

2% compound that over the course of a calendar year, 2% per month, that it's

an astronomical return for management.

let's assume for a moment.

Now we're going to start focusing on reward your risk multiples of five to one.

That means we're trying to make $5 for every $1 that we risk.

And we're keeping the same sample set of looking at 10 trades.

And we're still looking at the accuracy rate of 30%.

The only thing that's changed now is reframing trades that have a

multiple of five to one reward.

Suddenly our three winning trades out of 10 sample set, the average profit

becomes 250 hours or three wins at $250.

Average brings us a subtotal of $750.

The seven losses in the sample set of 10 trades.

Average loss is $50 that still leaves us at a subtotal of 350.

$750 minus $350 gets us a net profit of $400 or a 8% return.

Now, again, if we're looking at 10 trades over the course of one calendar

month to see results like this, with it very, very low accuracy rate of

30% still brings us an 8% return.

That's a wonderful return for a monthly, uh,

now we're going to take a look at having a low accuracy rate of 30% with

the reward, the risk multiple of $5.

And now we're going to be risking 2% of our account.

So now the average win jumps to $500 and the average loss jumps to $100.

Again, keeping accuracy at a low 30% accuracy.

That means we're losing 70% of our trades out of a sample set of 10 trades over the

course of a calendar month, three wins.

At 2% risk portrayed multiple a five to one ratio, three

I'm sorry, reward the risk.

Our average profit jumps to $500.

If our three winning trades at $500 average profit, this gives us a

subtotal of $1,500 or seven losing trades at an average loss of $100 or

2% of our equity and the subtitle.

Would obviously be $700.

Now the average loss in average profit would increase as the

equity increases or drops.

Uh, but for these examples, we're looking at the sample size of data

and a sample set of 10 trades.

So the details are mentioned here with a very hypothetical basis, but with subtotal

on three wins of 1500 hours and yeah.

Seven losses, subtotal or 700 that would give us a net gain of 750.

Yeah.

Or 15% return again, crazy returns with just a very low accuracy.

Now think about this for a moment.

When you first got into trading, you were wanting to get 90% accuracy or a

hundred percent accuracy or 98% accuracy.

You can still make ridiculous returns with having very low accuracy.

Okay.

You don't need high accuracy.

You need the framing of the reward, that risks multiples in your face.

And we didn't really go crazy with our risky, that we're

only doing 2% maximum portrayed

I said, now that we're going to look at an accuracy increase to

40%, nothing's changed outside of the previous example here.

So now we're going to say 40% of a sample set of 10 trades.

Four of the 10 trades are winning trades, average profit per trade.

Still at $500.

Or four trades at 500 hours.

Average profit brings us a subtotal $2,000.

Our six losing trades as a 10 average loss is still remains

at a hundred dollars per loss.

Six of them would give us a total of $600 that would give us a net profit of $1,400,

which would be again, that's a 28% return with just a 10% increase in accuracy.

The factor of 2% for real.

And reward the risk ratio again, creamy on a model of five to one.

Now, we're going to look at an increase in our accuracy to say we've been trading

for a while and we know our trading model a little bit more intimately.

We know what we're trading.

We know how to frame our trades.

Uh, we've learned patients, uh, we've been able to, uh, stick

to our rules and our parameters.

Are, uh, reward the risk framing.

Uh, we knew how to reduce our risk while we're in a trade.

And our accuracy increases by default.

Uh, we're going to say we jumped to a 50 50 basis.

In other words, half our trades are winners and half our trades are

losers on a sample set of 10 trades.

The average Wednesdays at 500, the average law stays at 100.

Yeah.

Uh, five wins at an average profit of $500 brings us to two us up total $2,500 while

five losses of the 10 simple set trades.

Average loss is a hundred dollars or a subtotal of $500.

So $2,500 minus $500 loss on five losing trades because it's a net profit of

$2,000 or a 40% return on 10 trades.

The factor of just increasing a 50 50.

We're reward to risk five, the one with a risk portrayed, 2%.

The only thing we're doing is framing our trade around a little bit more success.

In other words, our ability to read price action.

Look how fast our multiples jump up and we haven't increased the number of trades.

We haven't increased the risk per trade.

Either

a accuracy rate of 50 points.

Our rewards risk model stays at five to one, but we're going to

lower our risk portrayed to 1%.

That means the average win drops back down to $250 per win.

And the average loss is down to $50 per win.

Our hit rate we're going to say is 50 50 still.

That means five winning trades.

Average profit is $2,250 and five winds at 250 hours brings

us a subtotal of 1,250 hours.

And in five losing trades out of the sample set of 10 trades, average loss

being 1% of the $5,000 account or 50 hours in this case, five losing trades,

but an average loss of 50 hours, it gives us a subtotal of $2,250.

So $1,250.

The five wins minus the subtotal of $250 on the five losing trades

gives us a net profit of $1,000.

Now I want you to take a look at this for a minute.

Okay.

Think about this for a minute.

You only have to be right half the time or the other way of saying it

is you can afford to be wrong half the time you're looking for trades

that pay him out five to one, and you're risking 1% of your account.

Okay.

Think back to the moment when you first started learning about trading

and you felt that you had to put big risks on, we're not talking about 2%,

which is the industry standard here.

We're talking about 1%.

1% makes millionaires.

If you look at the 1% risk portrayed, any accuracy rate of

only 50%, this by itself is exactly.

What everyone would dream of as three to return 20% per month.

If you could get 10 trades per month, half of them be wrong, but framed

all of them on five to one reward risk with 1% risk only your rate of

return is 20% with only 1% at rest.

This is optimal trading goals.

This is exactly what you should be aspiring to do.

You're not trading a lot.

You're not demanding a high rate of success or accuracy.

You're not pushing the limits on your risk.

You're keeping it at a low you're doing half the industry standard in

terms of, uh, risk per, uh, portrayed.

Usually it's 2% maximum.

Okay, well, we're doing one right.

Let me ask you a question.

What if you were to drop that risk portray down to a half a percent, would

you be upset with 10% return per month?

My question would be, why would you be upset with that?

Now, imagine if we were to consider what was 2% per month with 30% accuracy, 1%

risk portrayed with three to one reward to risk model on our first example.

That's exactly.

Large funds look to do for their clients over the calendar year.

They're looking for one to 2% per month.

And if they can compound that over the course of a year, they

can give their investors a 20, 25 to 28% return on the year.

And believe me, there are millions and millions of dollars sitting out

there that would love for someone to be able to do that for them.

So you don't need to have these astronomical rates or return per

month to manage other people.

Believe me, they will go crazy.

If you give them 1%, one and a half percent, 2% per month, and

you only need to do three to one reward risk to do that with 1%.

If you do 1% here and you have a 50% chance of being accurate and

you frame your trades around five to one, look how easy it is to get into

a really high end yield for them.

20%.

You don't have to train every single month if you're managing

our money or other people's money.

See, this is an optimal goal because it gives you the cushion to do

basically half a year of trading.

There are some months in a year that you don't really want to be trading.

So if you can do a multiple of five to one and yield really handsome results,

and I'm not saying that everyone's going to get 20% returns, right.

Every single month, but this should be a good trading goal for you to frame

your trades around were expecting only half your trades to be accurate

framing on five to one reward, to risk keeping your risk low 1%.

By doing this, it gives you the optimal objectives.

It gives you low-hanging fruit, it doesn't force performance, and it

gives you an opportunity to relax and actually enjoy the process.

There is no fear.

That's justified in taking losses.

They are all part of this business.

It's all part of the game.

It's all part of your job.

As an equity manager, you're going to weather losses.

You're going to assume you're going to assume losing trades.

That's all cost of doing business.

No one goes through their career without taking losses.

You're going to have lots of them.

If you trade for a long time, if you had a column of all your wins and all

your losses, your losses are going to be very, very long in the list,

but does not dampen, or it does not remove the profitability factor.

That's still available to traders that know how to frame the trades

with good multiples of reward, to risk keeping risk managed, and defined.

And thinking about how they're going to trade with these parameters.

If we use the example we showed in the beginning of this video with

a 20 PIP stop, all you have to do is take well what's 1% of $5,000.

It's 50 hours.

So if you had a 25th stop, you'd divide that by $50 and

I'll give you your dollar per.

Leverage and that's what you would use for your trade.

And that would give you all of these numbers that you see here.

Now, again, we can only speak in terms of hypothetical, but it's a rule or

general principle that you're going to build on as a trader highlighting the

fact that you don't need high accuracy.

I did not show 60% accuracy.

I didn't show 70% accuracy.

I didn't show 80 or 90.

None of that's necessary, but yeah, as time goes on and you grow in

your proficiency and your, in your understanding about price action, and you

as the trader by default, your accuracy rate will increase and you'll never demand

or need for it to be higher than 50 50.

So until the next discussion in next teaching, I wish you

good luck and good trade.