When trading, many people cannot hold their positions when making money. They are eager to cash in as soon as they make a small profit. Conversely, when they incur losses, they cannot cut their losses in time and watch their positions plummet.
As a result of this back-and-forth, they end up earning little and losing much over the long term, leading to a situation where they are 'always on the road to breaking even.' The reason traders experience this problem is that new entrants often have a short-sighted perspective—they place too much weight on immediate trading results, are unwilling to accept losses when they are losing, and are eager to prove their success when they are making profits, resulting in the bad habits of 'holding positions' and 'cashing in.'
However, a trader's success does not come from the results of one or two trades, but from a comprehensive performance over a long period of time, even a lifetime. When dealing with money, it is always difficult for people to evaluate their trading results in the long run, which causes most people to earn little and lose a lot in trading, making it hard to achieve long-term and stable profits.
To address such issues in trading, traders need to develop a risk-reward mindset—before entering the market, we must plan the trading position range in advance and decide on the take-profit and stop-loss locations beforehand, rather than making last-minute decisions while holding a position.
The setting of the profit-loss range usually needs to follow certain market logic. We can use technical analysis, fundamental analysis, and other methods to estimate the final distance of the trend and use this as a basis for setting the profit-loss range.
At the same time, the setting of the risk-reward ratio must also adhere to certain mathematical principles. Only by ensuring that the expected profit in each trade is greater than the expected loss can we avoid the situation of earning little and losing a lot over the long term—therefore, the risk-reward ratio for every trade must, in principle, be greater than 1:1.
In a clearly trending one-sided market, traders often choose a larger risk-reward ratio to maximize profits, such as 2:1 or 3:1. However, in a generally poor market environment, traders tend to compress profit ranges and use a smaller risk-reward ratio, such as 1:1 or 1.5:1.
The setting of the risk-reward ratio is closely linked to trading strategies and market conditions, so there is no optimal risk-reward ratio or golden risk-reward ratio. For trading novices, cultivating a mindset focused on risk-reward ratios and ensuring that every trade has a risk-reward ratio greater than 1:1 should be the first step toward achieving long-term stable profits.
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