My student asked me today: There is a sentence on page 391 of "Technical Analysis of Financial Markets": The best traders can only make money in 40% of the transactions . Is this true? How do traders make money?
I said: There is nothing wrong with this sentence, and the probability of 40% is already very high.
When we first started trading, we must have heard a sentence: cut losses and let profits run . The meaning of this sentence itself is to advocate a high trading profit and loss ratio.
Today's article will talk to you about what is the profit-loss ratio and how to improve our profit-loss ratio.
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What is the profit and loss ratio?
Profit and loss ratio is a very simple concept. Take a coin toss as an example, if you guess right, you win one piece, and if you guess wrong, you lose one piece, the profit-loss ratio is 1:1; if you guess right, you win three yuan, and if you guess wrong, you lose one piece, the profit-loss ratio is 3:1 .
In the transaction, each correct transaction makes a profit of three, and each wrong transaction loses one, and the profit-loss ratio is 3:1.
There are several specific situations for the profit-loss ratio in actual combat:
The first type: fixed point profit and loss ratio
Each time the stop loss is 50 points, and the profit is set at 100 points, as long as each transaction adopts the trading logic of a fixed position; the profit-loss ratio is 1:2, as long as the success rate reaches 33%, the account can reach the balance of profit and loss.
The second type: fixed profit and loss amount
For example, in my real account in the picture below, the stop loss of 100 US dollars for each transaction is set to 200 US dollars, and the profit-loss ratio is 1:2. The position is adjusted according to different stop loss spaces; the proportion of each stop loss point is the same, but the number of stop loss points is not fixed. Similarly, as long as the success rate reaches 33%, the account can reach the balance of profit and loss.
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The third type: the trading logic of dynamic exit
The stop loss is fixed or dynamic, but the stop profit must be dynamic, and the profit-loss ratio changes.
Such trading logic usually uses a fixed position fund management method.
For example, it is often used: follow the trend with the inflection point, follow the trend with the trend line, or follow the trend with the moving average; this is the real trading logic that makes profits run. The profit-loss ratio of this way of exit is dynamic.
In many cases, the profit-to-loss ratio may be unreasonable and the success rate may be very low, but once you encounter a very large trend in the market, you will get a very high-quality profit-to-loss ratio, and rely on one or two large profits with a high profit-to-loss ratio to recover the previous losses.
How to improve the profit and loss ratio?
Objectively speaking, the profit-loss ratio and the success rate are two ends of a balance; excessive emphasis on the profit-loss ratio will lead to a decrease in the success rate; How can we achieve a relatively reasonable balance?
First: switch between large and small periods to obtain a more advantageous profit-loss ratio.
(Look at the big and small) For example, in actual trading, I switch the time period for judging the trend and the period for entering the market, judging the trend in a large period and choosing an entry signal for a small period.
For example, in the trading, the 1-hour band uses a 5-minute period to enter the market, the 4-hour-level swing uses a 15-minute period to enter the market; the 15-minute band in the internal market futures uses a 1-minute time period to enter the market. The purpose of doing this is to enter the market with a small cycle, and to get a better profit-loss ratio with a large cycle.
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Second: Arrange positions reasonably and choose a more advantageous entry position.
A form of breaking position, is to build a position in advance before breaking the position? Or open a position when the breakthrough occurs? Or wait for the market to reverse after the breakthrough occurs and then enter the market?
These three ways of entering the market bother all traders; although the price advantage of entering the market early is reasonable, the profit-loss ratio is reasonable, but the possibility of mistakes is also increased; the disadvantage of entering the market while waiting for a breakthrough to occur is that the price of entering the market is relatively high; The three methods of entering the market after waiting for the market to break through, it is possible that due to the strong trend market, no withdrawal is formed and the trading opportunity is missed.
The best way to solve this problem is to build positions in batches, and choose a compromise point between the position price and the profit-loss ratio, taking into account both the success rate and the profit-loss ratio; this will make the performance more balanced, stable and feasible.
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Summarize
The result of any transaction cannot avoid two factors, profit-loss ratio and success rate; what traders pursue is the combination of profit-loss ratio and success rate to maximize profits.
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