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TLDR: I get confused by simple statements like "40% chance of making money" and then using that to set targets, since the two things are not independent variables.
In the summary he mentions again the 40-60 rule that when in a broad channel or trading range, odds are in the 40-60% range of making money. I assume he means the odds of an equidistant move, correct?
He also says that since the odds are often 40% of making money, you should go for a reward twice your risk to get a profitable trader's equation. But if it is 40% of a 1:1 move, then surely it is not 40% of a 2:1 move, correct?
I would suspect that if it is 40% chance of a 1:1 move that it something like 25-30% chance of a 2:1 move, thus both would have poor trader's equation. In my mind, a bad trade is a bad trade, and simply extending the profit target doesn't magically make it a good trade. I'm also thinking in terms of a single entry/exit and not of scaling-in, since that appears to be a whole different type of math.
If instead we are saying it is a 40% chance of a 2:1 move, and thus we should go for 2:1 instead of 1:1, that would not make sense to me either since that would imply a 55-60% chance of a 1:1 move, and both would be profitable strategies, no?
I can't remember if it was in one of the books (I've read all 3 in the series), in an earlier video, or on discord/webinar, but I believe I read/heard that when you take a credible trade, the overall EV (expected value, i.e. how much money you will make on average) is the same regardless of if you go for 1:1, 2:1, 3:1, etc., the only difference being you will have a higher win rate with smaller reward targets, but I can't remember if there were more conditions on that.
What am I missing?
Hey Daniel, took a shot at answering your question. Hopefully it helps!
Just to clarify, when you say 2:1 do you mean risk:reward or reward:risk?
Yea sorry Mr. Carpet; the original post was using 2:1 as Reward:Risk. I'll start saying profit target is 1R 2R or whatever to be clearer (where R is the risk).
Interesting video F M, and thanks for taking the time to make it. In your example you initially estimated 53% for the 1R and then after strong bull bar you estimated 76% for a 0.5R, to give a combined 40% for the original entry going for 2R. What this means to me is, if you took the initial trade on b21, before seeing b22, and planned for 2R, then the odds were actually less than 40% for the 2R move. Why? because there will be plenty of times where you don't get a strong bar like b22, and thus the overall percentage of a 2R move, without knowing the future, would be less than 40%. Meaning, blindly holding for the 2R move given the numbers you gave would not give a profitable trader's equation either. Maybe if you did some hybrid move, where you would take the 1R profit if it got there weakly, but extend to a 2R target if it got there strongly?
I went back and wrote down what was actually said, for reference: "I also talked some about the 40-60 rule. Only 10% of the bars on the chart are in breakout mode and you should only trade in the direction of the trend. 90% of the charts are either in a broader channel or in a trading range, and the probability of making money is between 40-60%. So let's say your stop is 10 units/pips/ticks below, if you go for a reward that is twice that, you have a positive trader's equation, because the probability is at least 40%, and anytime you hold for a reward twice your risk, you are going to have a positive equation."
Maybe what he meant to say is, anytime you take a credible swing setup, the probability of a swing profit will be at least 40%? Because the way it is worded makes it sound like all I have to do to have a profitable equation is go for 2R, which is most certainly not the case, or else I could just blindly close my eyes and pick a direction and make money.
If someone can clarify what he actually meant I would greatly appreciate it.
