Easy to overlook the fatal misconception: the balance between profit and loss ratio and win rate
Many people trade, not low win rates but still lose money; the problem lies in the misconception of profit and loss ratio and win rate. Diagram two illustrates how many consecutive losses you might encounter based on your win rate in 50 trades; the key is to control risk, ensure the account can withstand the worst-case scenario of consecutive losses, and keep drawdowns within expectations for better execution of the trading system.
1️⃣ Profit and loss ratio: Big profits and small losses vs. Small profits and big losses, how big is the difference?
① Big profits and small losses (high profit and loss ratio) = the core of stable profits
Average profit far exceeds average loss, such as a profit and loss ratio of 2:1, 3:1, or even higher.
Advantages:
Strong drawdown resistance: A single profit can cover multiple losses. Even with a low win rate, it can still make money long-term.
Expand profit space: Hold profitable positions as long as possible, follow the trend, and capitalize on the dividends brought by market fluctuations.
No need for a high win rate: A win rate of 40% combined with a profit and loss ratio of 3:1 still constitutes a stable profit strategy.
Disadvantages:
Easy to encounter consecutive losses: Because the win rate is relatively low, there is greater psychological pressure, requiring patience and discipline.
Needs to wait for significant market movements: Few entry signals, not suitable for those who like high-frequency trading.
Practical example:
Profit and loss ratio 3:1, win rate 40%
Make 10 trades, 4 profitable, earning 300 each = 1200, total loss of 6 trades × 100 = 600
Final profit = 600, even if the number of losses exceeds the number of profits, it still makes money.
② Small profits and big losses (low profit and loss ratio) = an invisible trap on the path to profit
Average loss far exceeds average profit, such as a profit and loss ratio of 1:2, 1:3, or even lower.
Advantages:
The short-term sense of achievement brought by a high win rate: High trading success rate can easily create the illusion of 'being very capable'.
Suitable for high-frequency trading: Quick in and out, frequent profits, satisfying the psychological needs of short-term traders.
Disadvantages:
A single loss can wipe out multiple profits: No matter how much you profit, if you can't control a single loss, you'll give it all back.
Extreme market conditions have high risks: If stop-loss is not strict, it may lead to a total loss.
Huge drawdowns: Hidden loss risks often explode after seemingly stable profits.
Practical example:
Profit and loss ratio 1:3, win rate 90%
Make 10 trades, 9 profitable, earning 100 each = 900, but 1 loss of -900
Final = 0, all hard-earned profits returned, or even possibly a loss.
2️⃣ Win rate: The higher, the better is not always true; the key lies in the combination of profit and loss ratio.
Misconception: Only pursuing high win rates, ignoring profit and loss ratios, can easily fall into the trap of 'small gains and big losses'.
Correct mindset:
Low win rate + high profit and loss ratio: A win rate of 40% combined with a profit and loss ratio of 3:1, long-term profit without pressure.
Moderate win rate + good profit and loss ratio: A win rate of 60%, profit and loss ratio of 2:1, more balanced and stable.
3️⃣ How to find a profit and loss model that suits you?
Both have their advantages and disadvantages.
Prefer trends? Choose a big profit and small loss strategy, tolerate a low win rate, and maximize profits.
Like short-term trading? Choose a moderate profit and loss ratio + high win rate, but strict stop-loss is necessary to prevent total loss. Profit relies on combinations, not single data; trading isn't about winning every single trade, but rather:
Small losses + break-even + small profits + big profits = stable profits
Without a mature trading system, it's like sailing without a compass; trading chaotically cannot achieve stable profits.
