1. Managing downside risk - the gambler's approach
The trader doesn't take a view on the market: he essentially flips a coin. Half the time he will be right and half the time he will be wrong. The way to make this work is to make sure the limit always exceeds the stop.
For a hundred trades (limit=30; Stop=20):
50*(+30) = 1500
50*(-20) = -1000
Net = 500 pips i.e. 10 pips times 50
This on the face of it is very lucrative. However 30 pip moves are difficult to call. If you look at the previous FX MoneyMap webinars, you will see many occasions when price has got to 18 or 19 and then fallen back. Sometimes price will try an advance again sometimes the position reverses. Vanilla trades are breakout trades and reversals are common. You will also see that this situation cannot be improved by making the stop tighter: doing this leads to a greater number of stopped out trades and consequently the statistical advantage is lost.
2. Managing downside risk - wins exceed losses
This risk strategy is less lucrative but is very effective when the win:loss ratio is large. It results in short times in the market but does require the trader to take a view of the market. Fortunately, with Fx MoneyMap, this is relatively easy with experience.
For hundred trades (limit=9; Stop=30)
80*(+9) = 720
20*(-30) = 600
Net = 120 pips
Morty Sill - London
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