The Underlying Logic of Trading Profits: The Compound Effect of Small Advantages

Core Viewpoint: Trading profits are essentially a probability game, a 5% difference in win rate can lead to a 3-fold difference in returns

1. Simplified Profit Formula

Average profit per trade = (Win rate × Profit magnitude) - (Loss rate × Loss magnitude)

Example:

- Retail Trader: 45% win rate × 1.5 units profit - 55% loss rate × 1 unit loss = +0.125 units

- Professional Trader: 55% win rate × 1.5 units profit - 45% loss rate × 1 unit loss = +0.375 units

2. Key Difference Amplifiers

• Increase win rate by 5% → Profit doubles (0.125→0.25)

• Increase win rate by 10% → Profit increases by 200% (0.125→0.375)

• Optimizing the profit-loss ratio (e.g., 1.5:1) is more important than simply increasing the win rate

3. Real-World Variables

• Trading Costs: A 0.1% commission can offset about 10% of theoretical returns

• Execution Bias: Emotional trading can reduce model returns by 50%

• Market Structure: The effectiveness of strategies can be impacted by up to 300% in trending vs. ranging markets

4. Professional Trader Mindset

• Prioritize controlling losses (Stop-loss < 2/3 of profits)

• Amplify small advantages through position management (1%-3% capital exposure)

• Validate strategies with statistics (at least 100 trade samples)

5. Long-Term Compound Effect

Assuming 20 trades per month:

• Retail Trader annualized ≈ 30% (0.125×20×12)

• Professional Trader annualized ≈ 90% (0.375×20×12)

After 5 years, the difference reaches 32 times (1.3^5≈3.7 vs 1.9^5≈24.4)

Note: This model does not consider extreme market conditions; actual trading requires dynamic risk management. Core Insight: In a repeatable system, the accumulation of continuous small advantages is far more important than a single large profit.