Direct from the desk of Dane Williams.
I’ve said it before and I’ll say it again.
The most crucial concept in forex trading is risk management.
But done correctly, your risk management plan can provide the framework to precisely determine your potential downside risk, all while keeping the door wide open for UNLIMITED potential profits.
This is what I mean when I refer to forex trading with closed risk and open reward.
It's a common pitfall for many traders to fixate on accumulating numerous small wins.
Running at a 90% win rate sounds great on paper.
Well great until you see your hard-earned gains vanish in a single catastrophic loss.
The real strategy lies in a different approach.
That of embracing numerous small losses while letting your winning run as long as the market allows them to.
Whether they’re big or small, shifting your mindset away from taking more losses than winners is tough.
I’m not going to lie.
But the essence of closed risk and open reward lies in its simplicity and logic.
You always define a specific point at which you'll exit a trade.
No questions asked, no room for ambiguity, this is the point you’re out.
Your stop-loss order.
Think about it as something like a safety net beneath you ask you walk a tightrope between cliffs.
Even if the chance you fall and die is small, why would you risk it?
You would never.
This is how you need to think of always having a stop loss in the market.
Not having one is just not worth the risk.
Anyway, with this safety net in place, you can confidently enter trades knowing that your potential losses are capped at a predetermined level.
This controlled risk can also eliminate the anxiety that often plagues you when the market turns against you.
So now the lame stuff is out of the way, let's talk about the exciting part.
The open reward!
Once you've set your stop-loss, you're free to let your winning trades flourish as the market sees fit.
There's no predetermined limit to how much you can gain from a profitable trade.
It's like allowing a plant to grow as tall as it can, with no restrictions.
The magic of this strategy is in the mathematics.
If you consistently let your winning trades run and cut your losses short, you don't need a high win rate to be profitable.
A few big wins can easily offset many small losses.
Imagine you have a series of trades.
Some are winners and some are losers.
But by ensuring that your winners are significantly larger than your losers, you're on the path to consistent profits.
To put it into practice, you need to cultivate discipline.
Stick to your trading plan, and don't let emotions sway your decisions.
When a trade reaches your pre-determined stop-loss level, exit without hesitation.
It's part of the game and you’re going to just have to come to terms with accepting a ton of small losses.
Conversely, when a trade starts moving in your favor, don't rush to cash in your chips.
Allow it the freedom to grow and reach its full potential based on what support and resistance in the market is telling you.
This requires patience and the ability to withstand temporary fluctuations.
The beauty of closed risk and open reward is that it aligns with market dynamics, but human psychology of needing to win more than you lose makes it extremely difficult.
This is why so many traders end up failing.
You need to reprogram your brain to take losses and let your winners run.
Put simply, profitable forex trading over the long run hinges on the principle of closed risk and open reward.
Embrace the concept of limiting your potential losses through well-placed stop-loss orders while granting your winning trades the liberty to reach their maximum potential.
It's a strategy that combines logic and discipline.
Offering you a path to consistent profitability.
Best of probabilities to you.