In the trading arena, we aspire to advance cautiously and strategically, necessitating the acquisition of essential skills and knowledge. However, in practice, technical prowess is not omnipotent. When we feel complacent, reality teaches us a lesson. We may anticipate a substantial profit, only to end up with a crushing defeat.
Of course, in the trading market, success and failure are not determined by a single transaction or decision, but each instance has the potential to shape our future destiny. If we wish to succeed, how should we break through the stalemate?
Avoid Overreliance on "Market Predictions"
As you engage in trading over time, you will come to understand the fundamental principles of trading: admit losses promptly and allow profits to grow continuously. However, this is not based on accurate market predictions. In fact, most of the time, predicting the market itself carries certain risks.
Misjudgment is an inevitable phenomenon in the trading process. Excellent traders should aim to maximize profits rather than the number of wins. Professionals make significant money because their average gains far exceed their average losses.
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As a trader, do you often encounter such confusion: some professional traders enter the market at a worse time than I do, often stopping losses, yet their returns are so high. Why is it that, despite finding accurate entry points through various technical indicators, I end up with a high opening and low closing, almost blowing up my account?
In the trading field, we often believe that a high win rate leads to good returns, and accurately predicting market trends is an important skill. But reality always slaps us in the face. Even if our judgments become more accurate, our capital pool shrinks, and our principal is almost depleted.
Escaping the Pitfalls of Trading Losses
To quickly emerge from the trading predicament, we need to recognize the following points:I. Maintaining a "High Win Rate" is a Mistake
The unpredictability of the market dooms us to find it difficult to maintain a high win rate, which is an objective determination. Since the market is complex and changeable, no technical system can guarantee perpetual applicability. Spending too much energy on improving the win rate may yield minimal results.
Therefore, for traders to grow, they must break out of the one-sided "pursuit of win rate" fallacy.
II. A High Win Rate Does Not Mean Making Money
At first glance, this conclusion seems contradictory. With a high win rate, it should be the case that the chances of winning are much greater, and making money naturally becomes easier.
But the reason is simple: trading is a continuous process, and a high win rate is hard to play a decisive role unless it is sufficiently high. For example, being right once may only earn 50,000, but being wrong once could result in a loss of 300,000. In such a calculation, the win rate must exceed 85% to make money. Moreover, the win rate of most people is often below 50%.
This also involves two other important concepts: the profit-to-loss ratio and capital management. If these two are not scientific and reasonable enough, we will still fail. It is very necessary for us to spend more energy on expanding the profit-to-loss ratio and capital management to achieve twice the result with half the effort.
But in fact, most of the losers think that failure is due to not seeing the market trend accurately, thinking that improving the ability to read K-lines can lead to success. However, making small profits and then incurring large losses, or making large profits and then incurring large losses again, is the essence of failure.
Always remember that losses are a part of profit-making, and incurring losses is normal. Strive to achieve "losing less each time, earning more each time". Without a trading strategy and skills that can "maintain the profit-to-loss ratio" and "capital management," even the highest prediction accuracy is in vain.III. The Right Risk-Reward Ratio is the Key to Making Money
The risk-reward ratio is a lagging indicator. We can only determine our own risk-reward ratio after conducting many trades and analyzing the statistics. Therefore, while we engage in more trades, we should also summarize our experiences.
It is difficult to guide our entry into the market based on the risk-reward ratio. If we forcibly set a risk-reward ratio, it is likely that profits will turn into losses, or we might miss the market trend.
How should the risk-reward ratio and the win rate "coexist"?
An excellent trading system requires both the risk-reward ratio and the win rate to be maintained at a high level.
For most traders, there are two options: a high risk-reward ratio with a low win rate and a high win rate with a low risk-reward ratio.
The principle of a high risk-reward ratio with a low win rate system is that even with a low win rate, as long as we can achieve substantial profits when we win, we can offset the losses from multiple losing trades and achieve overall profitability. The principle of a high win rate with a low risk-reward ratio system is to make small profits frequently.
The main weakness of a high risk-reward ratio with a low win rate system is the high cost of missing opportunities. For systems with limited opportunity tolerance, when a major trend emerges, the system does not have an entry point; for systems with a high degree of opportunity tolerance, the win rate is extremely low, in other words, such a system is unstable. Moreover, it has a high drawdown, which requires a high psychological demand from traders.
On the other hand, a high win rate with a low risk-reward ratio system often cuts profits short and allows losses to run, which does not meet the basic requirement of overall profit in trading - the profits made multiple times are not enough to cover a single loss.
ConclusionA reasonable profit-to-loss ratio and win rate are the cornerstones of a mature trading system. A good trading system is not something that can be established overnight. On the one hand, we need to engage in more trades, summarize experiences, and overcome our own weaknesses. On the other hand, we must continuously learn from the experiences of others and draw lessons from them. On this basis, we explore and create a trading system that suits ourselves, continuously improve, and ultimately reap the fruits of victory.
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