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EP182: How does the Profit Bricks Method Work
In this episode of Truth About FX, Walter talks about the profit bricks method and how to overcome your psychological barriers. He also reveals some useful tricks on how you can make those losers work and turn them into profitable trades.
Download (Duration: 05:45 / 13.8 MB)
In This Episode:
00:36 – mathematical guideline02:00 – four possible results04:52 – how it differs from normal trading?06:00 – a tradeoff08:07 – be aware of probabilities10:22 – independent events12:13 – Monte Carlo simulation
Tweetables:It’s a psychological barrier
@TruthAboutForex http://fxtr.co/ap" rel="noopener noreferrer">[Click To Tweet].Embrace the uncomfortable [Click To Tweet].Be aware of the probability [Click To Tweet].
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. I read your book “Risk Management” and it’s excellent. The thing that stuck out the most in that book to me was the Profit Bricks method. Could you talk a little bit about that and is there a mathematical guideline as to when that will help you and when it won’t?
Walter: It’s more of a psychological barrier, I think. Great question, by the way. This is something that we’re talking a lot about in our Inner Circle group. A lot of people are trying to wrap their head around it and the reason why is it’s uncomfortable.
I believe as many traders believe that sometimes, we have to do the uncomfortable things to improve our trading. I think that’s part of what goes on with Profit Bricks. But, just for people who do not understand it, I’ll quickly explain.
Let’s say that you have a trading system and it’s a 3 to 1 reward to risk ratio. You are risking 1% to make 3%. You are risking a 100 pips to make 300 pips or whatever. Let’s also say that you have a 30% win rate with that strategy.
It has a positive expectancy, of course, because it is above the 25% mark and you could just trade it normally and you could make money. But, here’s where it gets really interesting.
Let’s say that I’m trading the strategy and I am just trading it normally. I’m risking 1% or whatever. If you’ll look at your trades at the two-trade level — a two-trade increment which is what Profit Bricks is all about. If you think about it, there are really only 4 possible results.
Number one is that you have a loss and then that is followed by a loss. Now, obviously, if you’re risking 1R on any given trade, you’re going to end up -2R after that sequence. In this scenario that is going to happen 49% of the time.
The reason why it’s 49% is to get the probability of something happening. You just multiply the probability of it happening by itself. So 70% of the time, I have a loser multiplied 0.7 x 0.
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By Walter Peters (FXJake) and Hugh Kimura (Trading Heroes)In this episode of Truth About FX, Walter talks about the profit bricks method and how to overcome your psychological barriers. He also reveals some useful tricks on how you can make those losers work and turn them into profitable trades.
Download (Duration: 05:45 / 13.8 MB)
In This Episode:
00:36 – mathematical guideline02:00 – four possible results04:52 – how it differs from normal trading?06:00 – a tradeoff08:07 – be aware of probabilities10:22 – independent events12:13 – Monte Carlo simulation
Tweetables:It’s a psychological barrier
@TruthAboutForex http://fxtr.co/ap" rel="noopener noreferrer">[Click To Tweet].Embrace the uncomfortable [Click To Tweet].Be aware of the probability [Click To Tweet].
Announcer: Sometimes, forex trading is a wild and wooly place to be. That’s why Hugh is here, to post your questions to Walter, the naked forex guy. Hugh’s got questions and Walter’s got the answers. Here at the Truth About FX Podcast.
Hugh: Hi, Walter. I read your book “Risk Management” and it’s excellent. The thing that stuck out the most in that book to me was the Profit Bricks method. Could you talk a little bit about that and is there a mathematical guideline as to when that will help you and when it won’t?
Walter: It’s more of a psychological barrier, I think. Great question, by the way. This is something that we’re talking a lot about in our Inner Circle group. A lot of people are trying to wrap their head around it and the reason why is it’s uncomfortable.
I believe as many traders believe that sometimes, we have to do the uncomfortable things to improve our trading. I think that’s part of what goes on with Profit Bricks. But, just for people who do not understand it, I’ll quickly explain.
Let’s say that you have a trading system and it’s a 3 to 1 reward to risk ratio. You are risking 1% to make 3%. You are risking a 100 pips to make 300 pips or whatever. Let’s also say that you have a 30% win rate with that strategy.
It has a positive expectancy, of course, because it is above the 25% mark and you could just trade it normally and you could make money. But, here’s where it gets really interesting.
Let’s say that I’m trading the strategy and I am just trading it normally. I’m risking 1% or whatever. If you’ll look at your trades at the two-trade level — a two-trade increment which is what Profit Bricks is all about. If you think about it, there are really only 4 possible results.
Number one is that you have a loss and then that is followed by a loss. Now, obviously, if you’re risking 1R on any given trade, you’re going to end up -2R after that sequence. In this scenario that is going to happen 49% of the time.
The reason why it’s 49% is to get the probability of something happening. You just multiply the probability of it happening by itself. So 70% of the time, I have a loser multiplied 0.7 x 0.