Glacier Valley · Camp 1 · Glacier Gate
Risk and stops
At the mouth of the valley, a narrow path runs between two walls of ice: Glacier Gate. Ayaz, the rope master, lets no one set foot on the ice until they're roped in. Here you'll learn where a stop goes, and how to measure a trade's risk and reward before you enter.
The camp's rules
- 01
Your stop goes where your trade idea is proven wrong: just past the last trough on a buy, or the last peak on a sell. Not a pip count you picked out of habit.
- 02
Risk is the distance between your entry and your stop. We call it 1R. Counting wins and losses in R lets you compare different charts with the same yardstick.
- 03
Risk/reward: distance to target ÷ distance to stop. A trade whose reward is smaller than its risk struggles to pay off over time, even with a good win rate.
- 04
The middle of a range is where risk/reward is at its worst: the stop is far and the target is close. Look for trades at the edges.
- 05
Expected value = win rate × average win − loss rate × average loss. A system that wins 40% of the time and makes 2R per win earns +0.2R per trade. One that wins 70% of the time but makes 0.3R per win and loses 1R per loss comes out at −0.09R.
Teaching
The stop is where you're proven wrong
Every trade has a reason, like "the trend is up and price bounced off the last trough." The stop is the price where that reason stops being true.
On a buy, that's usually just below the last trough: if price breaks it, the higher lows are over. On a sell, it's just above the last peak.
A fixed stop like "always 10 pips" doesn't listen to the chart. Sometimes it takes you out while your idea is still fine. Sometimes it keeps you in long after the idea has broken.
Ayaz · Rope master
The reward has to be worth the risk
Risk is the distance between your entry and your stop. We call it 1R. Reward is the distance between your entry and your target.
Risk/reward = reward ÷ risk. With a 50-pip stop and a 150-pip target, the ratio is 1:3: a win pays three times what a loss costs you.
The target is usually the next wall: resistance above on a buy, support below on a sell. If the wall is close, the reward is small too.
Ayaz · Rope master
Expected value
A system's average return per trade: win rate × average win − loss rate × average loss. It's measured in R.
Deniz: 70% win rate, wins of 0.3R, losses of 1R. 0.7 × 0.3 − 0.3 × 1 = −0.09R. That's a loss of about 1R every ten trades, despite the high win rate.
Someone else: 40% win rate, wins of 2R, losses of 1R. 0.4 × 2 − 0.6 × 1 = +0.2R. They lose six trades out of ten and still make 2R over those ten.
Ayaz · Rope master
Lessons · 5
- Story
Glacier Gate
Meet Ayaz and learn that nobody steps onto the ice without a rope.
- Lesson
Where the stop goes
Put your stop where your idea breaks, not at a pip count you picked out of habit.
- Lesson
Risk and reward
How many times farther away is your target than your stop? Measure it before you enter.
- Lesson
Win rate isn't enough
Read win rate and risk/reward together: does the system make money over time?
- Exam
Glacier Gate exam
Set the stop, measure the ratio, enter in the right place.
Test yourself
Deniz puts the stop 10 pips away on every trade without looking at the chart. What's wrong?
- ✓ The stop comes from habit, not from the chart
- · 10 pips is too far; it should be 5
- · Nothing. The same stop every time is discipline
You drive the stake into solid ice, not wherever your hand can reach. Where the stop goes comes from the chart. How much money you risk is set by your lot size (you'll learn that at the Supply Hut).
Entry 100.0, stop 99.5, target 101.5. What's the risk/reward?
- ✓ 1:3
- · 1:1.5
- · 3:1
Risk 100.0 − 99.5 = 0.5; reward 101.5 − 100.0 = 1.5. The reward is three times the risk: 1:3.