Original subtitles

are right and how much you lose when you are wrong. When you

doesn't matter whatsoever in trading. It's pretty

irrelevant. It's all about how much money you make when you

after 10 trades you would actually make a net profit of

can truly grasp this concept, the psychology of trading will

trades play out over time you're going to have that 50/

that to try and squeeze out as much sort of maximum as we can

that a little bit obviously as we go on to actually learn the

you know if you just put this on anywhere and you just let

so yeah that's pretty much it it's it's very very simple you

obviously even so we're going to have that risk reward

you know having that high rewards really is powerful. So

two R so what this means is with a 3-1 risk reward ratio

more money we will make on our winners and then that form

compact stats mode just because you know it's just a little bit

box here is our risk right so obviously the aim of the game

like on the charts we're obviously like I said trying to

essentially the the the grey here is our reward and our blue

within trading and the methods that we can use to increase our

get this as small as possible whilst trying to get the trade

you can be wrong up to 75% of the time and still break even

you guys need to know for now but yeah we'll we'll get into

you an average reward to risk ratio of 3 to1, then on average

kind of an inverse relationships between strike

your average wins and size of your average losses right to

your long position and your short position and then just

of your average loser is only minus one R then that will give

you have a pretty low strike rate of 30%, then on average

at the actual technical side of the strategy so let's say that

this in a lot more detail when we actually start to look yeah

of one and then you know that would just be your 50-50% edge

50 edge right so what we want to try and do is reduce

your heads is just that relationship which is typically

this case I've just changed it to a blue box you know changes

and your risk rewards you achieve right so the size of

minus one hour loss right we always keep our Rick's fist

rate and risk reward and then how that translates onto on the

to run enough further as long as possible and and the more

pip target and then a you know 20 per stop loss that's

to your rewards so your ratio is getting smaller and smaller

and obviously as you decrease your stop loss size your reward

Right, so we've essentially looked at the sort of basic

because your risk is bigger and bigger you know in comparison

a high reward to risk ratio strategy where it really no

is double click to open up the stats because I have it on

this save down to your favorite toolbars up here if you have a

make your stop loss bigger right and your reward stays the

know if you can you can open this up again and play around

risk management lessons on position sizing right we know

that means we can afford to have a lower strike rate right

get away with and still break even you know at a bare minimum

the higher this number is the lower the strike rate you can

this box as big as possible here so that we increase our

same that means that your risk reward is going to fall right

your reward to risk but displayed as a number so if you

means you know as long as our losses you know that strict

is going to get bigger right hopefully that is kind of self

you need in order to break even depending on what your average

R multiple is so if you are multiple it's essentially just

profits too early out of fear or maybe letting your losses

that's when you have a really powerful combo and you can

denotes your risk rewards so what I'm actually going to do

that when you open this up so hopefully you guys should have

save those down so yeah it's really really simple

essentially where you know this is a long position the line in

the risk reward tool that we very briefly looked at in the

whatever you want it's kind of irrelevant the color but yeah

the middle is where you enter gives you the price on your

mathematical relationship between both your strike rate

higher strike rate. So hopefully you've watched the

70% of their traders lost money despite having a reasonably

maintaining an extremely high strike rate which is not easy

of the masses of traders make you know such as taking your

give you your average risk reward okay great but how does

your losers are say double the size of your winners then your

then you can find it on the left hand side where you have

charts and see what this actually looks like on there.

you gain more and more experience and knowledge and

you're hoping that it's turn around in your favor then

trying to consistently hit the you know the huge home run wins

high strike rate of 62 percent. And it's all because those

quite a few losses or break evens or you know maybe very

go for that higher strike rate approach but they struggle to

isn't going to trend that far and it will often pull back to

either stop you out and you know despite you being in a

fail? And you may remember the the trading data that was

you should now have a pretty good idea of what expectancy is

longer matters if you take many losing trades as long as you

start to make some serious money. So, let's hop on the

even however if you can get your average winners to be

winning trade then you need a 67% strike rate just to break

you try and increase your average reward risk ratio by

reward to risk ratio is one to 2 if you divide one by two you

off and a bit of a balancing act between both your strike

decent amount of running profit beforehand. So you can take

rate and your average reward to risk ratio because they

easier. Now, if you're new to trading, you may have some

tiny wins before you hit and bank that big winning trade. So

still break even it's really showed the true power of having

Now this presents a psychological barrier. Because

they often require traders to lose more often than they win.

education companies they'll market high strike rate

healthy net profit. Now although high reward risk

difficulty trying to accept that you could spend, you know,

through the threshold of trading a consistency. Now,

completely numb to losing trades and you will break

probability really works. I know that if you persist

edge and that being right or wrong, you know, it really

run because you just can't stomach locking the loss in and

reward to risk and strike rate comes into play and the higher

you're going to have a low average reward to risk ratio so

are over the long term now there are two profitability

to do now here's a table that shows a required strike rate

achieve the reward to risk ratio required to make money

short and let your profits run so that your winning positions

you can expect to win three trades out of every 10 right,

charts we're actually sizing up oppositions and yeah that's all

losses but then once we're in the trade how we try and manage

but if the size of your average winner is plus VR and the size

how we actually can get away with extremely tight stop

with it and just put in the pips so let's say we have a 20

that we can do that the bigger our risk rewards will be the

much time working on your psychology and showing you how

a trade over the long run. It's impossible to always be right

trades on average had a negative reward to risk ratio.

and it all comes back to the human psychology of avoiding

technical aspect of the strategy you're going to learn

much relevant too. So when it comes to analyzing your

but for now all you need to really kind of get around in

trading, combining these stats together to calculate your

more than cover your losing trades and leave you with a

whereby we are consistently losing. So this is why most

profit expectancy will give you a much more accurate

typically an inverse relationship. So the more that

analyzed from the popular retail broker FXCM where over

what this can mean is that your strike rate will be a bit lower

with those two profitability models, it is generally a trade

have it on the default mode there and as you can see as you

Ricks are at risk fixed right with that small stop loss then

clearer but essentially that would explain it there if you

through any of the hard times, you will soon just become

explanatory so yeah this is pretty much what an edge looks

which is simply those that win more times than they lose and

overall profit expectancy is just zero dollars so he's

averaging $200 profit per trade even though he's losing and

risk reward so as you can see this number here in the middle

right hand side and then this represents your risk right in

is to get this box as small as possible and we want to get

when trading Forex however calculating your expectancy it

be right on each individual trade to instead how right you

time but when he did he won big with $3, 000 on average and

his loss rate which was only 25% and we can see that his

can really help you to shift your focus away from trying to

know we are managing then those positions well going back to

strategies that win big but not necessarily often as they

that actually look kind of in reality you know when we are

trading on the charts and we're sizing up positions and you

ratio but also start to slowly increase your strike rate as

and important it is to focus on the metrics as a whole that

strategies because the masses follow that concept much

your loss rate. So in one's case he had a high win rate of

average loss on your losing trades and you multiply that by

his average loss which is a whopping $3, 000 multiplied by

reward to risk strategies are essentially to cut your losses

models in trading the first is a high strike rate strategy

your win rate. And then you add this figure to the size of your

representation of your true trading performance. So you can

usually have a much lower strike rate so the idea high

essentially think of your expectancy in the market as the

irrelevant metric. Your average P and L on its own is pretty

three times the size of your average losers so you have an R

he's wrong 70% of the time his high reward to risk strategy

get no. 5 so that is your R multiple so in that case if

your average losing trade is double the size of your average

keep your loser small then your winners will for your loses and

multiple of three then you can be wrong 75% of the time and

more. Now, when you can maintain a high reward to risk

which means he had a healthy positive profit expectancy of

formula to calculate this now. So you take the size of your

needs to win even more often or improve his average reward to

that we risk in the market. So you should already know the

in that case your only hope of becoming profitable is by

have a negatively skewed reward to risk ratio like Quan and

your average reward to risk ratio then the less often you

actually need to win so if you make all the mistakes that most

then if we add this to his lost rate which is quite high at 70%

but he only lost $1000 on average on his losing trades

still make a net profit overall so hopefully now see how clear

winners are three times larger than his losers so this gives

expectancy which then gave him a profitable edge in a 50/ 50

us a lot more insight into the traders and we can see that

average. Now when Steve is right he makes three thousand

wrong he makes an average three grand loss. So this means that

then a lot of the time when you're in those trades price

coin flip game so going back to our two traders batting out we

dollars on average per trade and when he's wrong on average

in comparison to a trader who aims for a much lower lower

overall so that's where the inverse relationship between

pain and wanting to be and that's why most traders try to

Now you can see their losers were bigger than their winners

first episode in this module called are you destined to

so you multiply those together and add that to the number to

a lot of your time losing and this is why we have spent so

risk ratios over their 100 trades. So when one wins he

strategies are more common and preferred by more professionals

much we stand to gain or lose as a trader for every dollar

so for Juan's strategy to become profitable he either

his losers are three times bigger than his riders on

the second is a high reward to risk ratio strategy which are

it's against our nature to continue doing something right

two hundred so what does this actually mean well despite

winning 75% of the time Huan is a break even trader because the

75% and he made $1, 000 on average on his winning trades

reward to risk ratio and they can typically have a slightly

trade so in other words to calculate the traders reward to

wins a trade as well as the amount lost when they lose a

ratio improves, right? Now, in the previous lesson where we

matter because strike rate on its own is a completely

gain in any one trade where Steve is looking for a much

traders strategies stack up against each other we need to

bigger payoff but he's not willing to risk as much as Quan

their win rate and that's one way in which the casino

average P and L increases and our average reward to risk

amount that you theoretically get paid on average to execute

breaking even now when looking at Steve he only won 30% of the

size of his losses far outweigh the size of his winning trades

calculate the profit expectancy so this essentially tells us

pence when he lost and for Seb to pay him a full one pounds

only know the first two ornaments so their win and

average profit on winning trades and you multiply that by

when he won this is the fourth method right because he

means that he can be wrong much more frequently than Juan but

of our winners and or decrease the of our losers so that our

risk ratio now Steve's profit expectancy it tells that he's

example, where Sam negotiated with Sarah to only pay her 90

improved their expectancy. Now, if you also remember the

Quan is willing to risk three times more than he stands to

size of your loss on your losing trades so to improve our

per trade now to really understand how each of our

he has a negative reward to risk ratio of one to three as

need to know the amount of profit made when each trader

he only loses a thousand dollars. So means he has a

their lost rate but to know who is the better overall trader we

Juan is right a lot more often than Steve is when trading but

win or how often you lose and or we need to increase the size

positive reward to risk ratio of 3to1 as on average his

by altering these four elements so we can either improve our

profit expectancy and there are only four elements that

decreases losses so that his winners were then bigger than

his losses which finally gave him a positive profit

missing some key pieces of information having an edge in

determine your edge in the market your win rate your loss

makes an average profit of $1 000 dollars per trade and when

strike rate which is the first two elements so how often you

the market essentially just means that you hold a positive

rate of 75 percent. Steve on the other hand he managed only

strike rate of just 30 percent. So who is the better trader?

to truly determine who is the better overall trader we are

green zero to the roulette wheel which stacked the odds in

their favor ever so slightly to give them an edge by increasing

30 wins and therefore booked seventy losses giving him a

discussed how casinos make money, we saw that they added a

Well based on just these stats alone we can clearly see that

edge in the markets we need to increase our profit expectancy

75 wins and just 25 losses giving him an incredible strike

rate the average profit on your winning trades and the average

which may actually surprise some of you so let's look at

started with the same amount of trading capital. Now Juan took

these two traders Juan and Steve who are battling it out

develop a trading strategy that also has a positive expectancy

mathematical edge is and we have looked at how casinos are

positive edge so now we're going to look at how we can

just like a casino does and we're also going to look at how

important it actually is to be right in trading the answer to

By now you should have a pretty clear understanding on what a

in the markets both of them have 100 trades each and

the masters of the world at exploiting their slight

become vastly easier on your psyche.