Today, I will analyze two core dimensions of the trading process.
Trading mindset and profit and loss ratio: the trading mindset determines whether you can stay at the table long-term, while the profit and loss ratio determines whether you can win at the table.
I. Trading Mindset
Livermore once said: prices always move in the direction of least resistance.
My understanding is: there is always a wave of smart money moving in the direction of least resistance, guiding the market price. When this behavior accumulates, it can create a butterfly effect, leading to increased market price volatility.
The main factor affecting trading mindset comes from the fear brought by market uncertainty and price volatility.
Common trading mindsets include the following
1. "Elevator War God"
Straight up and down, commonly known as chasing gains and cutting losses, without any rational thinking—chase it when it rises, cut it immediately when it falls.
2. "Paper Wealth"
Always thinking it will go up again, wanting to get a big result. Even when the market and expectations no longer have any good news, they still live in their own perception, ultimately falling into the abyss.
3. "Average Down Maniac"
First trade lost 5%, add! Second trade lost 8%, add again! Finally, fully invested, but the stock price keeps falling without looking back.
4. "Regret Loop Machine"
Every time I sell, it goes up, so I conclude: next time I must hold on. When the next time comes, it's a roller coaster ride back to square one, slapping my thigh: I should have run earlier!
II. Profit and Loss Ratio: The 'hard mathematics' of risk and return
Profit and Loss Ratio = Average Profit / Average Loss
High win rate ≠ High profit
1. Dynamic Profit and Loss Ratio Calculation (using ETH as an example)
| Condition | Entry Price | Stop Loss Price | Target Price | Profit and Loss Ratio |
|-------------|--------|--------|--------|--------|
| Volatile Market | 3800 | 3780 | 3820 | 1:1 |
| Breakout Market | 3800 | 3760 | 3900 | 2.5:1 |
| Trend Continuation | 3800 | 3750 | 4000 | 4:1 |
2. The 'Asymmetric Leverage' of Profit and Loss Ratio
1:1 profit and loss ratio: requires a 55% win rate to be profitable (57% considering transaction fees).
3:1 profit and loss ratio: only requires a 30% win rate to be profitable.
Trading = Psychological Execution * Mathematical Advantage:
A good mindset is the first condition for placing orders, while the profit and loss ratio assesses whether the timing is worth it, where the expectations lie, and what the take profit and stop loss levels are.
Irregular updates, the next article will introduce how to maintain a good trading mindset and the reasonable position of profit and loss ratio.
