Applying Risk Reward

7:44 AM

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Making Money With Forex

Applying Risk Reward.

Understand the Power of the Numbers Game!

Is Risk:Reward the Holy Grail of Strategies?

If you give risk:reward the thought that it deserves you will soon understand just how powerful of a role it can play. You will quickly understand how, all by itself, it could make or break you as a trader. In this lesson we will take a look at the numbers game behind risk:reward but before we do that it is also important to quickly review the power of what you have learnt so far.

If you are able to master your trading psychology and properly use the price action confluence of a solid location, chart patterns, market structure, entry trigger and market layers, your win rate will very easily be 70% or higher. There are VIP members here at ElectroFX.com who go months without a loss but this is not something you will be able to achieve overnight. You won’t know your win/loss ratio until you have been trading for a while but you will be able to determine it before you start trading live. Let’s take a look at how applying a risk:reward strategy to your trading plan can help you succeed no matter what your win/loss ratio is, this may just be the holy grail piece of your puzzle.

Use Simple Math to Your Advantage

Don’t worry if maths is not your strong point, there is nothing complicated about this. Let’s assume that you will always risk 2% of your account on every trade that you take. As outlined in the stop loss lesson; you can avoid the need to worry about different size stop loss’s on each trade by using a percentage risk. Not every trade is going to have the same size stop loss so this is a great approach if you want to eliminate the need to think about it.

In this following table we will base everything upon having taken 10 trades using different risk:reward ratio’s each time. Each example results in the same 4% profit for your trading account, yet each example has a different amount of trades won vs lost. 1:1 should always be considered as your minimum risk:reward requirement for any single trade. A 1:5 risk:reward trade is not something you will find very often but it does serve it’s purpose here as an example.

For those of you who prefer to view everything in pips instead of percentages here is another table with the exact same information. If you had a plan that allowed you to always limit your stop loss to the exact same amount of pips every time then you could look at it this way. Based on taking 10 trades this is how it would all play out for the same total profit.



The fact is that if you trade using the evidence based approach outlined here at ElectroFX.com then you do not get to decide what the risk:reward ratio on a trade will be. The strategies outlined so far will however allow you to understand what the risk:reward ratio on any given trade is, before you enter. In turn this means that you can decide what the minimum risk:reward ratio you will accept is going to be. If the trade setup that you are seeing does not meet that minimum then you just need to sit out and wait for the next one.

A Very Conservative Calculation

Earlier on in this lesson you were told that a 70% win rate is very realistic with the approach that has been outlined in these lessons. A higher win rate than that is very possible so let’s assume a lower win rate to be conservative. Based on only ever winning 60% of your trades here is another look at those same risk:reward ratios to compare the outcomes.

By always winning 60% of the trades that you attempt you can see the mathematical advantaged that a risk:reward strategy can provide. It’s not complicated, but it is powerful, and it should play a part in your complete trading plan.

Finding Your Risk:Reward Balance

Flipping a coin would give you a 50% chance of getting a trade correct. The whole purpose of you studying right now is to top the scales further in your favor than that. Knowing that it is realistic to achieve a 70% win rate, that some traders can go long periods of time without a loss, and that flipping a coin gives you a 50% chance, why not assume that with the correct knowledge you can achieve a 60% win rate. Based on that 60% win rate; if you have a minimum 1:1 risk:reward ratio as a rule then you are keeping that small advantage knowledge has given you. That 1:1 is just a minimum though and you will also get the odd 1:2 and even 1:3 risk:reward trade, pushing things even further in your favor.

If you progress along with your trading and notice that you are only winning 50% of your trades, make a small adjustment. Your minimum risk:reward rule on any one trade could be changed to 1:1½ or 1:2. That would make winning 50% of your trades profitable and you could always adjust it again later on once your win/loss rate improves.

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Take Profit Projection

6:40 AM

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Take Profit Projection.

Take Profit Projection.

Determining the Probable Future!

Predict the Future Based on the Past

You need a proper strategy for judging take profit and this piece of the puzzle basically means predicting the future. Fortunately the Forex market is a creature of habit and history tend to repeat itself. Furthermore, historical price movement allows you to assume the most probable future based on your trade being correct. This is all you can do as a trader, assume that you are correct and work with the most probable outcomes based on whatever proof you have at hand. In the previous lesson you were shown how to use a stop loss in case you are incorrect so the safety net is in place. Let’s now take a look at all of the different pieces of usable information that you will have access to before you enter any trade, and how you can use that information to your advantage.

Trend Continuation Buy Targets

Getting back to our first example we have the trend continuation trade. Whenever you enter a trade you will do so because you believe that you are correct, otherwise why would you be entering? So with that in mind there are two simple techniques that you can use to help judge where your trade will most probably reach. The first is as simple as using support & resistance and supply & demand areas which you can look at as obstacles. The second is to gauge the momentum behind your trade using the latest highs and lows that are being made.






When it comes to the horizontal obstacles in your trades path, the most conservative target is always going to be obstacle 1 and a slightly more ambitious target is obstacle 2. Taking the middle road and shooting bang smack in the middle of them both is also a very solid option. If you then apply momentum you can see make sure that all three of those options appear to be likely. If you target the edge of the predictive momentum you will be pushing the most ambitious and greedy target and it is not advised. It may have worked out in this particular trade but what you want is to be consistent rather than get the odd big win.

In order to help you understand how to plot momentum there is an a, b, and c marked on the above screenshot at the highs and lows that would be used. These are the latest pieces of information that you can use. Points a and b are permanent highs and lows that are indisputable at the time of your trade entry, point c is not yet a confirmed swing low at the time of your entry and it is your trade being correct that will make it one. Point c gets used because you are assuming that you are correct, remember? why else would you be entering the trade in the first place!

Double Top Sell Targets

Our next example is the double top which presents a slightly different scenario. Due to the nature of this pattern there is no real momentum and obstacle 2 is the momentum line itself. Obstacle 1 takes in to account all of those spikes on the candles that created the previous low (point b) and safely targets above them.






The conservative target here is obstacle 1 just as it was in the previous example, this whole concept is rinse and repeat so that part never changes. The more ambitious target is obstacle 2 which is also the momentum line and a safe play is right bang in the middle of it all. In the previous example you were following higher highs and higher lows so you could expect more of the same. In this example we have a double top to fight the uptrend so although you can expect a slightly lower low it is much safer to assume a slightly higher low.

Momentum was plotted the same as before, points a and b were permanent fixtures at the time of your trade but point c was not. At the time you would be taking this trade point c would be a prediction based on you being correct and that is why it is used.

3-Point Turn Buy Targets

Our last example is the 3-point turn which is also the break of the double top highs and back to following trend. A higher high can be expected and obstacle 2 in this trade is actually off of the screen. Obstacle 2 is exactly where the arrow indicates and if you want to take a look you will need to bring up a GBP/USD daily chart and look at 2011.08.23 to see it.






In this example you can see just how greedy and unsuccessful targeting the momentum line would have been. Try to only use the momentum line to gauge how probable obstacle 2 is vs obstacle 1, or vs the middle ground of the two. The momentum line was plotted the same way using permanent points a and b along with the assumed point c like before.

You Now Know Your Potential Reward Before Entering

You are now at a powerful position where you know how to intelligently choose your trades based on proof, and also how to judge your stop loss (risk) and your take profit (reward). In the next lesson we will look at just how important understanding risk vs reward will be for your trading career.

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Stop Loss Protection

6:31 AM

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Stop Loss Protection

Stop Loss Protection.

Protect Your Account on Every Trade!

The Purpose of Using a Protective Stop Loss

The first reason for you to use a stop loss on every trade that you take is quite simply to protect your account. If you trade intelligently in a way such as has been outlined so far you will have a ‘price action reason’ for where you place your stop loss. There will be a chart pattern at a great location that once entered will have an obvious failure point where you are wrong. You will see exactly what is meant by that in this lesson.

The next reason to use a protective stop loss is because it will define your risk and this is information that you can use. Before you even enter a trade you need to know your risk so you can compare it to your potential reward. This piece of the puzzle will be clarified in a later lesson about risk vs reward.

Stop Loss Placement Without Layers

Using our 3 recent examples we first examine a stop loss placement strategy without using layers. You will then be able to compare this against how things are done with layers further down this page. This will then also help you with your understanding of the reasons behind the strategy itself since they both follow the same concept.

Trend Continuation Buy

In this first example of the trend continuation you can see that we are trading the mirror flip support & resistance location. This mirror flip made into a clear visual thanks to the green swing line and the support & resistance box. Furthermore this box was already re-tested by the next layer of price movement down which created the area of demand marked by the first X. This essentially involves a second layer without mapping one out on the chart. It does however help us pinpoint the exact area that we are trading giving us a pinpoint place for our stop loss.






The idea here is that we can see where there was previously order flow and have returned to it, the chart patterns are looking good and so is the location. If price however were to break the price that is the first X on the above screenshot, then our analysis would be wrong and therefore there is no point in holding the trade any longer. Allowing a few pips buffer on your stop loss is always a good idea but there is no need to allow price to break that first X by very much.

Double Top Sell

This next example is the double top trade and here the location was inherent in the chart pattern itself. The area that we are trading is given a clear visual thanks to the green swing line and the resistance box. The location was created by that first green swing of selling down and marked by the first X on the chart just below. As the entry trigger forms at the retest of that same area, marked by the second X on the chart, it is clear which area we expect to hold and therefore we have a pinpoint place for our stop loss.






The idea remains the same, we can see where there was previously order flow and have returned to it, the chart pattern and overall market structure looks great and so is the location. If price were to break the high that is the first X on the above chart then our expected chart pattern would no longer be valid. This would make our analysis wrong and there would be no point holding the trade any longer. A few pips buffer on your stop loss would be a good idea but there is no need to allow price to break that first X by very much.

3-Point Turn Buy

The next example was the 3-point turn which was also a trend following mirror flip location of the double top highs. Just like our first example the image below essentially involves a second layer without mapping one out on the chart. The area of demand, marked by the first X on the chart below, helps try to pinpoint a place where order flow in the correct direction started last time price was here. This gives us an area that we expect to hold and therefore a place for our stop loss.






The theme continues and we are trading the retest of an area that has already proven itself. The chart patterns and structure look good along with the location. If price were to break the low that is at the base of the first X on the above chart then we may be wrong in our analysis. There would be no point holding the trade any longer but a buffer of a few pips would be wise. This trade is very much a trend following setup that is also a high/low breakout style trade that is also taught here at ElectroFX.com. This type of setup does allow the choice of just using the second X as your stop loss but you will learn about that later on if you decide to continue your studies here.

Stop Loss Placement With Layers

When using layers the concept does not change at all but the information that you have to work with does. You will still justify your location in the same way as before but when it comes to the stop loss things are slightly different. Without layers you were following the idea of a location being created, then a location being retested and confirmed by the entry trigger. The stop loss was simply going two peaks back from those two reactions. Nothing changes with the idea but now with layers you have a faster way to look at what is two peaks back.

Trend Continuation Buy

Our first example of the trend continuation has no change in how you determined good location and what type of trade you are in. The addition of an extra layer here though shows you a 3-point turn type of reaction accompanied by an entry trigger. Following the same stop loss concept on a smaller scale, two peaks back is now a little different but still relays the same type of proof that you can use and react too.






In the above image you can see how two peaks back on the new layer effects how you see your stop loss. In the case of this trade the use of layers makes little difference to your stop loss but the concept should be getting clearer for you now.

Double Top Sell

This next example of our double top shows you again what was just outlined for you. The reaction and retest of the area you are trading is much closer together but the location and type of trade is based on not trading with the extra layer. The two X’s on the below screenshot give you a visual on what is now two peaks back.






Just like the previous example of the trend continuation there has been no real change in your stop loss for this trade. It is looked at a little differently but your end result stop loss price has barley changed. The use of layers here just helped you with pinpointing which entry trigger to use and gave you more proof to work with.

3-Point Turn Buy

Our last example is the 3-point turn after the break of the two double top highs. Things are slightly different here but the concept remains unchanged and repeatable. There are two choices when reading your stop loss placement on this trade and both are perfectly OK. You can go two peaks back on the black swing line as we have been doing so far, or you can observe the upside down head and shoulders pattern and realize that is the area you are trading.






Using layers on this trade changes your options significantly both for entry triggers to use and stop loss placement. The great thing is that all of them work out because the chart patterns, location, and overall market structure was all on your side. The power of trading based on visible proof should not be underestimated.

Stop Loss Size Doesn’t Have to Matter

A quick tip to wrap up this lesson is about your stop loss size because many people do get all wrapped up in it. The fact is that if you trade in the way outlined here at ElectroFX.com you will always know the size of your stop loss before you enter a trade. This means that you could risk a percentage of your account based on the size of that stop loss, which in turn means that the size of your stop loss doesn’t matter. The only thing that should matter is basing all of your decisions on proof and making sure that you never risk more than you are trying to gain. In the next lesson we will look at how support & resistance, chart patterns, and the overall market structure can also be used to determine where the best take profit will be. Knowing your risk vs reward pre-trade is a very powerful tool.

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Using Market Layers

7:57 AM

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Using Market Layers

Using Market Layers. 

Traders Battle on Different Scales

So Many Traders, So Many Styles

With so many different types of trader and so many different trading styles it is no surprise that the Forex market has many layers of price action at play. If you learn to read these layers then you can add that to the price action confluence you look for, and in turn also add to the probability of your trade working out. To avoid repeating the complete basics if you need a quick introduction to where I will now pick up from; re-visit this article here if you need to.

In an attempt to keep these initial lessons simple we have been using the daily chart. We have used a green swing line to represent the scale at which we wanted to trade. It has been 3 of those green swing movements that have been the study of your introduction to Forex trading strategies. Due to the power of the daily candle as an entry trigger, the use of layers is not as important as it is when you speed up your time frame. They are however still applicable and this will serve as your introduction on how you would use them.

Entering the Trend Continuation Buy with Layers

Since we are trading what is represented as the green swing on our chart examples, we must look for a scale of price movement that is below the one we are trading in order to use it. Some may prefer to do that by having a 2nd chart open on a slightly faster time frame, you will understand that in the free video course here at ElectroFX.com. It is however also possible on just the one chart and this is what we will do for now and for the sake of simplicity. In this next image a black line has been added to represent the next scale down of price movement relative to the green line we are trading.





This black line displays a faster scale of the buying vs selling war and it’s time to re-use your knowledge of chart patterns. In the previous lesson there were 3 candlestick entry triggers that you would have had your eye on to enter this trade, with the use of layers there is clearly only 1 candlestick entry trigger that you would be interested in. Let’s quickly review our entry trigger mechanism now including this concept.
This indecision candle reacts exactly from the upside down head and shoulders area marked with the X.
It is also at the turn of what will be the 3-point turn on the black scale of price movement / swing.
All we need now is to pass its high on the next candle which does happen and that is your entry price.

Entering the Double Top Sell with Layers

As we move on to the double top and apply the exact same concept you will see the next relative scale of price movement mapped out by the black line. Just as before some of you may prefer to do this on a 2nd chart running on a lower time frame. For the sake of page space and simplicity we will stick with one chart for now.





The black line brings back the use of chart patterns to help you understand the turn and choose the safest candlestick entry trigger. In the previous lesson there were 3 candlestick entry triggers that you would have had your eye on to enter this trade, with the use of layers there is clearly only 1 candlestick that you would be interested in. Let’s quickly review our entry trigger now mechanism including this concept.

• This indecision candle reacts exactly from our chosen area confirming that it is active.
• It is also at the turn of what will be the 3-point turn on the black scale of price movement / swing.
• All we need now is to pass its low on the next candle which does happen and that is your entry price.

Entering the 3-Point Turn Buy with Layers

Our final trade to review with the addition of layers introduces a different situation. The original entry trigger from the previous lesson is not in line with our new layer and so the entry may have been missed. The use of layers though provides a different entry trigger opportunity with more proof attached to it.





In the previous lesson there was an entry trigger at a great location but here it is not yet inline with the black layer that we have added. Once the 3-point turn starts to presenting itself on the black line there is another indecision candle to use as an entry trigger. Let’s quickly review this new entry based on the inclusion this layered concept.

• This indecision candle forms at what will be the 3-point turn on the black scale of price movement / swing.
• Location is still good based on the split double tap of the area marked X.
• The previous high on the black line pierced the previous high on the green line signalling intent to push up further.
• All we need now is to pass its high on the next candle which does happen and that is your entry price.

Food for thought:

If you did take the original entry trigger from the previous lesson, this new entry trigger based on layers could have been used to add to your position. Hmmm.

More Price Action Confluence, Entry Trigger Add-on

In the previous lesson we covered entry triggers and in the one before that we covered price action confluence. The use of market layers simply adds on to both of those pieces of the puzzle but does remain optional at the daily chart level. The lower the time frame the more valuable the use of market layers can be, and as you can see they can still be very effective even at the daily chart level.

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Price Action Confluence

1:43 PM

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Price Action Confluence

Price Action Confluence

Bringing the Pieces Together

Pieces of a Puzzle That Fit

In order to inject you with this knowledge slowly we will now take a look at how the previous 2 lessons connect together. It is this price action confluence that will allow you to trade very safely and based on evidence. You will never be able to continuously win every trade you take no matter how good you get, but you can keep those probability scales tipped handsomely in your favor.

Trend Continuation – Great Location

Starting with our first trade example of the trend continuation let us use an image to visualize the price action confluence behind it. At this stage in your learning it is important that you properly understand how each concept is working for you, and also how each concept is slotting together.





There is a lot of price action confluence going on with this trade and all tipping the probability scales in your favor.

• There is a confirmed higher low followed by a confirmed higher high (very clear in the wave structure),you plan to be part of the turn that will be the next higher low in the sequence.

• There was an area of resistance that is now acting as support (the squares in the above image),this is what is referred to as a mirror flip and at the support/resistance level location looks good.

• There was an area of demand that was also created and is now being retested (the circles in the above image),this can only be seen as a big plus adding more probability to an already good location.

Double Top – Great Location

The next trade example we had was the double top so let’s visualize the price action confluence behind it. If anything is leaving you scratching your head at this stage then you may need to quickly review the Forex trading basics section.





Once more, plenty of price action confluence at play, but with the double top location is also inherent in the pattern.

• There have been 4 pushes up since the move began at the bottom of the chart (very clear in the wave structure),you plan to be part of the turn that will confirm that a top has been reached and it is time for a reset.

• There was an area of resistance created and is now being returned to (the squares in the above image),this is where you look for a retest to begin so that you can be part of the double top pattern.

3-Point Turn – Great Location

The next trade from our chart was the 3-point turn after a reset in the upward momentum. In order to visualize all of the price action confluence at play let’s first look at the following image.





By now the price action confluence in this image should start to stand out for you.

• There is a confirmed higher high after the break of the 2 double top highs (very clear in the wave structure),

you plan to be part of the turn that will be the higher low in the 3-point turn sequence.

• There was an area of resistance that is now acting as support (the squares in the above image),

this is what is referred to as a mirror flip and at the support/resistance level location looks good.

• There was an area of demand that was also created and is now being retested (the circles in the above image),this can only be seen as a big plus adding more probability to an already good location.

Only Thing Missing is an Entry Trigger!

Chart patterns, market structure, and location can be used as a unit but there is one more connecting piece to the trade entry puzzle. You need to define yourself an entry trigger to confirm you are not alone in your analysis, a way to prove that the majority of those who actually move the market are on the same page as you. Technically this is also in the price action confluence category but it deserves it’s own lesson and that comes next.

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Read the Chart Patterns

4:13 PM

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Read the Chart Patterns

Read the Chart Patterns

Understand What Type of Trade

Chart Patterns and Market Structure

Chart patterns were introduced to you in the Forex trading basics section, they will now help you understand ‘how’ price arrives at these areas of support & resistance and supply & demand from the previous lesson. They awill also help you understand what type of trade to expect and therefore also help you judge a probable take profit point. In this lesson we are now going to just use the current market history to explore just that.

To start things off here is an image of the GBP/USD at the time this lesson is being written. A swing indicator has been placed on the chart to help visually map out the chart patterns and the market structure. Consider this tool like training wheels on a bike, they can be helpful for learning but not so necessary later on.





You should be able to see the chart patterns in that structure and therefore the types of trade that were available. We will now take a look at a few different types of trade that happened at great locations within this current market history.

Trend Continuation for Buying

Starting at the bottom of our GBP/USD chart there is a nice simple trend following pattern, you can see the wave that you would want to be trading from the arrows in this next image. Your knowledge of chart patterns from the Forex basics section of this website should mean that you remember what type of trade this is.





The final wave of this pattern is of course the one that you would want to be part of. The location of that final turn should make complete sense to you at this point but we will take a look at that in the next lesson. For now let’s just focus on the chart patterns of the last 3 different types of trade that were available in this recent history.

Double Top for Selling

The next and very different trade that we have on our chart is a double top pattern for selling. Once again you can see the wave that you would want to be trading from the arrows in this next image. You should recognize this pattern.





The final wave of this pattern is your trade and the location of that final turn is inherent within the pattern itself. We will take a look at it again though in the next lesson as we bring all the pieces of the puzzle together.

3-point Turn for Buying

The next available but different trade in recent history is technically a 3-point turn after a directional reset. In this next image the reset is defined by the double top and following lower low. The black square shows you where this has happened. After that reset in the directional move upwards price raced up and broke the 2 highs that were the double top, then formed the 3 point turn to push higher. This is very similar to the way you would view a range breakout style trade.





As always it is that last wave of the pattern that is your trade. The location element should be obvious to you by now but we will revisit all 3 of the above trades in the next lesson

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Forex Trading Strategies

9:54 AM

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Who Trades Forex

Forex Trading Strategies 

Successful Forex Traders Have a Plan!

Build Your Forex Strategy the Right Way

In order to start trading Forex successfully you will need to build a strategy that is so complete you don’t have to think too much when trading live. There is no point sitting there second guessing yourself and trying to make a decision when you are in a trade. You should already know how you are going to react to every possible scenario because you had spent the time considering them. This may sound like a tall order but once you are done with all of the lessons in this section you will see that it really isn’t.


Think about it; your only options are to buy or sell, the market can only move up or down, and the market will trend upwards, trend downwards, or consolidate in a range. When the market does change direction there are only so many ways that it can present itself. It’s actually all very logical and the hardest thing for any Forex trader to master ends up being the psychology of it all.

A Series of Strategies Create a Complete Plan

A complete Forex trading plan is made up of a series of strategies. You can break down the actions of trading in to the important pieces, trade location, entry trigger, and trade management. Each of those pieces will need its own strategies that are able to provide answers to all of the questions below.

Here is a list of the bare essentials that you would need to consider to take a any trade intelligently.

• What needs to happen for you to enter a trade?

• Why would you consider buying or selling in a particular price area?

• What would be sufficient evidence that you are not alone?

• When will you pull the trigger?

• How you will handle the risk:reward element?

• Where will you put your stop loss and why?

• What will your take profit be and why?

• What is the minimum risk:reward ratio you will accept?

• How will you manage the actual trade once you are in?

• When will you move your stop loss to break even?

• Are there any situations that may warrant moving to break even sooner?

• Will you use a trailing stop and how?

• What will your lot size and account management be like?

• What percentage of your account will you risk on each trade?

• Will you consider some trades more probable than others and risk more?

• Will you consider some trades less likely than others and risk less?

All of the above questions can be answered with a handful of price action based Forex trading strategies. It is all of those strategies that combine to make you a complete trading plan. This plan will enable you to successfully trade several types of trade and also give you a blueprint for adding more later on if you need them.



This series of lessons will show you Forex trading strategies that answer all of the above questions and show you several types of trade to expand on it all even further.

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