Each of us comes to the financial market to trade, it can be said that it is to make money.
When they first entered the market, they were full of longing, hoping to make a lot of money by relying on their ingenuity. However, after a year or two, I realized that it was not so easy to make money here after I fell down and got bruised and swollen. I gradually realized that if I want to make money here, it is impossible to trade based on our feelings and preferences. Need to build a trading system.
The high winning rate and high profit-loss ratio of the trading system are the dreams of every trader, but I have heard many old traders say that high winning rate and high profit-loss ratio cannot have both, and there is a mutual restrictive relationship between them, with a high winning rate It can only be a low profit-loss ratio, and a high profit-loss ratio can only be a low winning rate.
So why can't you have your cake and eat it too? Or why the winning rate and profit-loss ratio restrict each other?
I searched Baidu, WeChat, and Google, but I didn’t find an article explaining this. Let’s discuss it with everyone. If there is anything wrong, please correct me.
Let's look at two extreme examples:
The first is the mode with extremely high winning rate and extremely low profit-loss ratio.
If you don't care about the profit-loss ratio, or reduce the profit-loss ratio to an extremely low level, the winning rate can even reach 100% in a certain period of time, and this period of time can last for several years.
From the monthly chart, most varieties are actually in a wide range of shocks. Take gold as an example.
If the data before 1999 is excluded, from 1999 to September 2011 when the historical high is reached, the interval between the historical high and low is less than 1,700 US dollars, let’s count it as 2,000 US dollars. If you use an account of 10,000 US dollars, take 2,000 Stop loss in US dollars, place 0.05 lots, and exit the market after earning only 1 US dollar per entry, that is, the profit-loss ratio is 1:2000. From 2011 to now, at any point, whether you are long or short, you can Those who make money can have a winning rate as high as 100%. This is the most extreme mode with a 100% winning rate and a very low profit-loss ratio.
Of course, it is also possible to expand a little profit, the stop loss remains the same, and the winning rate is the same, but the opportunities are relatively less, or the time to realize profit becomes relatively longer; the larger the profit space, the fewer opportunities, and the holding position The average time to achieve profitability is longer.
You will find that you can even use 1,000 US dollars as a stop loss, but this is known after the fact. Before this year's wave of gains, you don't know where the lowest point of the callback is, and you can only use the historical high and low intervals to find out. be strategic.
And you can easily see the risks of this model. If you are unlucky, such as going long at the high point of the big blue frame, or shorting at the low point of the small blue frame and some low points behind, once the direction is reversed, it will Being stuck for several years, of course, the probability of this is relatively low, but it is real.
And if you don't close your position at the lowest position and hold it, no one can guarantee whether gold will reach 3,000 or 4,000 US dollars in a few years, or more than ten years. Once it appears, it will be a liquidation; Well, the profits accumulated through hard work will be swallowed up by this order, and maybe they will lose a lot, and the winning rate will also drop.
And if you want to increase the profit-loss ratio, you can only reduce the stop loss, and the probability of stop loss will naturally increase, and the winning rate will begin to decrease.
Therefore, a high winning rate comes at the expense of a low profit-loss ratio .
The second is the mode of extremely high profit-loss ratio and extremely low winning rate.
Contrary to the first one, if you don't care about the winning rate, or reduce the winning rate to a very low level, the profit-loss ratio can reach very high.
Similarly, if we set the stop loss at $1 and the profit at $2000, that is, the profit-loss ratio is 2000:1, you will find that the winning rate has been 0 for so many years; Now you have no guarantee that this single will be successful. So ignoring the winning rate, no matter how high the profit-loss ratio is, it is meaningless.
And if the profit-loss ratio is halved by 1000:1, then there is only one chance of success over the years; and if it is further reduced by 500:1, there are only two chances of success, and the continuous reduction of the profit-loss ratio will continue to increase the winning rate.
In other words, to increase the winning rate, the only way to reduce the profit is to increase the stop loss appropriately, and the natural profit-loss ratio will begin to decrease.
Therefore, a high profit-loss ratio comes at the cost of a low winning rate .
From these two extreme examples, we can easily see that there is indeed a mutually restrictive relationship between the winning rate and the profit-loss ratio.
If you don't want a lot of profit space, keep a high profit-loss ratio of 3:1, set the stop loss as small as 1 or 2 dollars, and make a profit of 3 or 6 dollars. If the stop loss is small, the error tolerance space is too small, and it will be swept frequently, and the natural winning rate is not high; and if the stop loss is appropriately expanded by a little 5 or 6 dollars, the price can have a certain amount of error tolerance space, and you should maintain a high ratio of 3:1 The profit-loss ratio requires a profit of 15 or 18 dollars, and you have fewer opportunities to capture this profit space, and the natural winning rate is relatively low.
And if you want to maintain a high winning rate, you must expand the stop loss or reduce the profit, or even the stop loss exceeds the profit, which is achieved by reducing the profit-loss ratio.
For example, if the stop loss is the same at $5, if the profit-loss ratio is 3:1, you need to make a profit of $15 to realize it, but if you exit the market with a profit of $5, the profit-loss ratio is 1:1, naturally it is easier to succeed, and the winning rate is higher; If the profit-loss ratio is further reduced to 0.5:1, that is, if the profit is 2.5 dollars, it will be easier to succeed and the winning rate will be higher.
Therefore, if you want to have a high winning rate, the profit-loss ratio will be relatively low; and if you want to have a high profit-loss ratio, the winning rate will be relatively low.
Therefore, you must understand that blindly pursuing a high winning rate and a high profit-loss ratio at the same time is like pursuing a mirror image, and it will put you in a situation where you cannot extricate yourself. It seems unrealistic.
All trading systems must seek a balance between the winning rate and the profit-loss ratio in pursuit of positive expected results.
In that case, after we have a relatively stable trading system, can't we increase the profit-loss ratio while having a high winning rate, or can't we increase the winning rate while having a high profit-loss ratio?
From a certain point of view, it can still be done, but it will be difficult to improve to a certain level, but there is no comprehensive statistical data to what extent it can be improved, due to personal and technical systems, etc. will vary.
How can it be done?
In fact, the best way is to reset .
1. If you choose the high winning rate mode and want to increase the profit-loss ratio:
Through the review, you can easily find out those transactions with relatively low profit and loss, summarize them into a pattern, eliminate this pattern, and not participate in such trading opportunities in the future, that is to say, only participate in opportunities with relatively high profit and loss ratios. Over time, your overall profit-to-loss ratio will improve.
And you can also review those transactions with a relatively high profit-loss ratio to see if you can expand the profit-loss ratio. If you can, it will also increase the overall profit-loss ratio.
And some people don't know how to look at the target position before entering the market, so they have no way of knowing whether the profit-loss ratio is appropriate. In fact, if you combine the "potential, position" in the "potential, position, and state" with the size cycle, it is easy to find target bit. (You can refer to my article "How to Build a Reliable Trend Trading System", which contains explanations about "potential, position, and state".)
2. If you choose the high profit-loss ratio mode and want to increase the winning rate:
Through review, you can also easily find out those transactions with a low winning rate, summarize them into a pattern, eliminate this pattern, and not participate in such trading opportunities in the future, that is to say, only participate in opportunities with a relatively high winning rate. After time, your overall win rate will increase.
And you can also review those transactions with a relatively high winning rate to see if you can increase the winning rate, and if you can, it will also increase the overall winning rate.
You might say, but profits and losses come from the same source. After excluding these opportunities, wouldn’t the profits decrease?
In fact, no, because these are opportunities with a low profit-loss ratio and winning rate, and some of the transactions will also generate losses, and transactions with relatively low profit-loss ratios will generate relatively large losses, which will lower your overall profit status; Or more participation in transactions with a lower winning rate, which generally reduces profitability.
Therefore, choosing a better opportunity to enter the market is the key to improving the overall profit .
The replay is not only to unilaterally increase the profit-loss ratio or the winning rate, but also to increase both at the same time. Of course, the benefits of review are far more than these, so I won’t list them here.
In fact, the reason is very simple, that is, many people always refuse to keep their feet on the ground when doing business, and always search and pursue the "Holy Grail".
And you can easily find that only those who take one step at a time, after continuous learning, introspection, and summarization, will eventually walk out on a broad road of their own.
Or if you have any different views, welcome to exchange and discuss together.
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