Everplayed the game Chinese Whispers? Keepreading to discover how it has corrupted the real meaning of risk to reward. In Chinese Whispers, a message is whispered from person to person. With each pass, slight variations occur until the final version is a mutated form of the original—missing key points and including invented ones. Similarly, a mutation has corrupted the common understanding of risk-to-reward. And this misconception is harming most traders.
The trading game is deliberately opaque—to ensure the majority of traders lose to pay the few who win. But what if you know when to enter and when to exit because you understand how the market communicates when to act? Using recent trading in the AUDUSD futures traded on the CME, let me illustrate. On May 16th, our plan allowed trading the short side but only as far down as 0.6664. There was no profit target—just a defined invalidation point for short trading, i.e. No Longer Short. at 0.6664.