Trader equation question

Hi Jason,

I see you joined the course 3 months ago. So having done the whole online course seems pretty fast to me. 

Everyone has his his own level of skills and talent, so not judging your specific case. But on average, I think 3 months is not long enough to gain a deep understanding of the principles.

But to answer your question:

The only situation where you need a reward at least twice the risk, is in Major Trend Reversal trades (for a swing). In that case, your Stop Loss will always be relatively close to your entry. And almost in any case, where you reach your minimum target (minimum two legs), you will have a profit of at least twice your risk. Of course, in this case, you're often whipsawed: 60% of the time, and this under the condition you've picked your MTR-setup well.

In case of a BO-trade, where you have a 60-70% chance of a MM, I think it's not so easy to distinguish between a real BO-setup, and a strong leg within a TR.

Speaking for myself, I often think I was able to identify some BO, so I take a very small position (1. because my SL is far away, 2. because I want to be able to take a 2nd half position in case the BO completely reverses). But even then, I find it very difficult. I always run into some support or resistance. Those S&R-levels narrow down, the market is going into BO-mode, and you're left with a 50-50 chance of profit-loss.

Al advises to start off with MTR-trades. I thought BO-trades were much easier, but I'm starting to understand why MTR's might be better after all to start with.

Hope that may help a little.

That does help thanks for the reply.

I just was caught up on the actual risk vs initial risk taught in the course. I don’t understand that variability when risk is used for the position size calculated at entry. It seems even if you were at 60-70% prob. If you had your winners taking profit at 1.5 or 2 times initial risk and you take your loss at actual you would be upside down in the long term. No? 

And yes….I have watched the videos non stop and simulator for practice. Still beginner ..eye opening info…and want to keep learning.  

Posted by: @jas1234ongmail-com

It seems even if you were at 60-70% prob. If you had your winners taking profit at 1.5 or 2 times initial risk and you take your loss at actual you would be upside down in the long term. No? 

I honoustly don't have a clue. It's very hard to tell, if you don't keep a journal, and categorize your trades, I think.

I'm also still studying. I use a very labour-intensive method of studying. So I have a few more years to go.

Hi Jason,

I'm new to Brooks' course as well, and actual risk was something that I had a hard time understanding initially as well for the same reason as you. The math just didn't seem like it worked in the long run. However after I started implementing Brooks' trade management style in my own trading, it did start to make more sense to me (although I still don't take profit based on actual risk, holding for bigger moves typically shows better performance). I'll try to explain what parts confused me:

The first thing I'd point out is that Brooks has a minimum profit target for actual risk profit-taking. I don't recall exactly what the tick/pip size is (I don't trade futures/forex), but I believe he says not to take profits based on actual risk if it's less than a scalp's profit. So if 2x actual risk is still a small fraction of the initial risk, you probably shouldn't take it.

The second, and more important, thing that helped me understand actual risk profit-taking is what losses are like when using Brooks' style of wide stops. What you seem to be assuming is that every time you lose a trade, you're going to be losing your entire initial risk, and therefore taking profit based on actual risk is bad math. However, most of the time, when using wide stops, you're not going to be losing your entire initial risk. I've found in my own trades, since switching to Brooks' style, that ~25% of my trades are at or around breakeven, and of the trades that are losing the average loss is closer to half of my initial risk.

So I believe when Brooks talks about taking profit at some multiple of your actual risk, that's really his way of saying that if your profit is greater than the size of your average loss, then that's a positive expectancy and at the minimum the math is good to take profit there (but going for the minimum is rarely the best choice). But please take my thoughts with a grain of salt, I've only been trading for a year and change, so I might be off base here.

Also as an addendum I'd like to point out that if you're trading with the trend that you typically shouldn't expect more than 1R, but as Brooks points out the math is still good because that will have a 60% success rate.

Thanks everyone for the help!! Makes sense