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2024/06

How to grasp win rates and profit-loss ratios for trading success?

In the trading world, we need to learn essential techniques and knowledge to progress steadily. However, in practice, technical aspects are only sometimes foolproof.

When we feel confident, reality often teaches us a harsh lesson. We can make a big profit this time but suffer a significant loss.

A single trade or decision does not determine success or failure in the trading market, but each trade can influence our future destiny. So, how can we succeed?

Don’t Overly Rely on "Predicting the Market"

As you trade longer, you will understand the fundamental principles of cutting losses quickly and letting profits grow. However, this is not based on accurate market predictions. Predicting the market inherently carries risks.

Making mistakes in judgment is an inevitable part of trading. Excellent traders should aim to maximize profits, not the number of wins. Professionals make substantial money because their average profits far exceed their average losses.

As a trader, you might often wonder: some professional traders enter the market at less optimal times than you and frequently stop losses, yet their returns are higher. Why does accurately timing your entry based on various technical indicators lead to high initial gains but eventually end in near-miss liquidation?

High win rates lead to good returns, and accurately predicting market trends is crucial. But reality often proves otherwise. Even as our predictions become more accurate, our capital pool shrinks, and we nearly lose our principal.

Breaking Free from Trading Loss Misconceptions

To quickly overcome trading difficulties, we need to understand the following points:

1. Maintaining a "High Win Rate" is a Mistake

The market’s unpredictability makes it difficult to maintain a high win rate. This is an objective reality because the market is complex and ever-changing, and no technical system can always be applicable. Focusing too much on improving win rates may yield minimal results.

Therefore, traders must break free from the misconception of solely pursuing high win rates.

2. A High Win Rate Doesn’t Equate to Making Money

At first glance, this conclusion seems contradictory. With a high win rate, the chances of winning increase, making it easier to profit.

However, trading is an ongoing process where a high win rate may only be decisive if it is sufficiently high. For instance, one correct judgment might only earn 50,000 yuan, but one incorrect judgment could lose 300,000 yuan. A win rate must be at most 85% to break even, which most traders do not achieve.

This involves two other critical concepts: profit-loss ratio and money management. Failure is inevitable without a scientific and reasonable approach to these two factors. Improving the profit-loss ratio and money management is essential for better results.

Most losing traders believe their failure is due to incorrect market predictions and think improving their chart-reading skills will lead to success. However, the essence of failure is small gains followed by significant losses or large gains followed by even more considerable losses.

Losses are part of the profit-making process, and experiencing losses is normal. Strive to “lose less each time and gain more each time.” Even the highest prediction accuracy is only possible with a strategy that maintains the profit-loss ratio and money management.

3. The Right Profit-Loss Ratio is Key to Making Money

The profit-loss ratio is a lagging indicator. We only understand our profit-loss ratio after numerous trades and statistical analyses. Therefore, we should continuously trade and summarize our results.

It’s challenging to guide entry based on the profit-loss ratio. Forcing a profit-loss ratio might turn profits into losses or miss opportunities.

Balancing Profit-Loss Ratio and Win Rate

An excellent trading system requires the profit-loss ratio and win rate to be reasonably high.

Most traders have two choices: a high profit-loss ratio with a low win rate system or a high win rate with a low profit-loss ratio system.

The principle of a high profit-loss ratio with a low win rate system is that significant profits from winning trades can cover multiple losing trades and achieve overall profitability despite a low win rate. In contrast, a high win rate with a low profit-loss ratio system relies on small but frequent profits.

The main weakness of a high profit-loss ratio with a low win rate system is the high cost of missed opportunities. Such systems may not capture significant trends, and highly inclusive systems may have meagre win rates, leading to instability and high drawdowns, requiring strong psychological resilience from traders.

High win rates with a low profit-loss ratio system often cut profits short and let losses run, violating the basic trading principle of overall profitability.

Conclusion

A reasonable profit-loss ratio and win rate are the foundation of a mature trading system. Building a robust trading system takes time and effort. It requires frequent trading, continuous summarization, overcoming personal weaknesses, learning from others’ experiences, and absorbing lessons. On this foundation, we can explore and create a trading system that suits us, gradually advancing to reap the fruits of success ultimately.

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