Trading is buying and selling. Buy low and sell high, or buy high and sell low. This is the situation for a single transaction. But if it’s a profession, it requires countless transactions, looking at the results over the long term.
Now, let's use a coin-flipping game to illustrate this process.
A transaction is like flipping a coin; heads is a win (profit), tails is a loss (loss). If you win, you multiply the betting amount by 1.8 (+80%), and if you lose, you multiply the amount by 0.5 (-50%). With a sufficient number of flips, the probability of winning is 50%. The profit-loss ratio is 8/5=1.6. The profit-loss ratio is the ratio of profit to loss for each trade. Betting 10 dollars each time, if you win, you earn 2 dollars, and if you lose, you lose 1 dollar; the profit-loss ratio is 2/1=2.
So how can one consistently achieve stable profits in this game? Assuming the initial capital is 10,000. It seems that with the game's profit-loss ratio and win rate, it could lead to continuous profits? Actually, that's not the case.
Each time using 100% of the capital for betting, winning once increases it to 1.8w, and then losing brings it back down to 0.9w. Or losing once to 0.5w and then winning again still brings it back to 0.9w. Do you see the problem? As long as there is one win and one loss, it is destined to decrease. Because 1*1.8*0.5=0.9, regardless of the order, it will always be left with only 90%. With a win rate of 50%, the more times you play, the more 0.5s and 1.8s get multiplied (equivalent to countless multiplications of 0.9), and the final result approaches 0. Of course, if luck is on your side and you win enough times, you can achieve exponential profits, but often you run out of all your funds before that luck arrives. The following image simulates the result of 300 instances, where only 5 lucky outliers multiplied their capital by over 100 times, while about 90 people nearly went to zero.
Earlier, I was using 100% of the capital for betting each time, which led to massive fluctuations. Now I will only use 20% of the capital for betting. If I win, it becomes 0.2*0.8=0.16, with the capital increasing by 16% (*1.16). If I lose, it becomes 0.2*0.5=0.1, with the capital decreasing by 10% (×0.9). The profit-loss ratio is still 16/10=1.6. After one win and one loss, 1*1.16*0.9=1.044, so the capital has increased by 4%. With a win rate of 50%, multiplying many 1.044s will lead to growth. The following image simulates the result of 300 instances. It seems absurd that 100 people all reached A9, but the win rate is indeed around 50%.
This illustrates the importance of position management under the circumstances of a determined win rate and profit-loss ratio. Using heavy positions and high leverage can cause significant volatility risk to the capital. In trading, you can manage your positions and profit-loss ratios well, but the challenging part is determining the win rate when the profit-loss ratio is set.
Speaking of which, trading simplifies to how to improve the win rate.
This is where traders differ; each trader has different skills and methods. Some rely on fundamental analysis, others on technical analysis (resistance and support, candlestick patterns), or technical indicators like MACD divergence, Fibonacci, etc., or a combination of various indicators and techniques to improve the win rate. There is no method that guarantees a win 100%.
How do I initiate a trade? Currently, I mainly determine the intentions and trends of the major players based on contract positions and capital flow, although it is not 100% accurate, but it can indeed uncover more opportunities. Real capital is not so easily deceived, but it does not rule out bad practices by the market makers. With proper position management and finding good targets to improve the win rate, stable profits depend on operational judgment and timing. If you are interested, you can check the homepage dynamics for more information.
Wishing everyone who reads this article stable profits and continuous wealth!
