Recently, I’ve been observing many traders’ loss situations and discovered a pattern: most people simply don’t understand how to calculate their profit and loss ratio. This isn’t a small issue; it directly determines whether you can survive in the market.

Let me start with a phenomenon. I’ve seen too many people who spend every day placing trades, making a little profit and then running, or holding on stubbornly when they lose. As a result, over a year, they’ve made quite a few trades, but their returns are always negative. They’ve never seriously calculated one key thing: what is my win rate? What is the average ratio of my profit per trade to my loss per trade? The combination of these two numbers determines everything.

Let me be straightforward: the profit-loss ratio is the ratio of how much you earn each time to how much you lose each time. It sounds simple, but few people truly understand it.

Suppose you have $100 in your wallet, and you risk only 10% per trade, which is $10. Now, do 10 trades. If your win rate is 10%, meaning you only win once and lose nine times, and each win and loss are in a 1:1 ratio (earning $10, losing $10), what’s the result? You earn $10, lose $90, ending up with a net loss of $80. This is the outcome of a 1:1 profit-loss ratio with a 10% win rate.

But what if your win rate is 20%, doing 10 trades and winning twice, still with a 1:1 ratio? You earn $20, lose $80, still losing $60. Continuing upward, at a 30% win rate, you earn $30, lose $70, losing $40. At a 50% win rate, you earn $50, lose $50, breaking even. Do you see? With a 1:1 profit-loss ratio, you need a 60% win rate to start making money.

That’s the problem. Most traders can’t reach a 60% win rate. It’s not because they’re not smart; it’s because the market itself is full of uncertainty. So what’s the solution? That’s where profit-loss ratio comes into play.

Now, suppose you increase the profit-loss ratio from 1:1 to 1:1.5. What does that mean? It means losing $1 per trade but earning $1.5 when you win. With this ratio, you only need a 40% win rate to be profitable. That’s much more realistic.

What if you can achieve a 1:2 profit-loss ratio? With a 1:2 ratio, you only need a 40% win rate to make steady profits without losses. Isn’t that easier?

Let me push it further. With a 1:2.5 ratio, you only need a 30% win rate. With a 1:3 ratio, also 30%. If you can stick to a 1:5 profit-loss ratio, meaning losing $1 and earning $5, then a 20% win rate can give you consistent profits. Twenty percent! You could even trade blindly and still have a higher success rate than that.

That’s why I keep emphasizing the importance of the profit-loss ratio. Many people go in the wrong direction, constantly chasing higher win rates, but ignoring the power of the profit-loss ratio. Instead of spending energy trying to increase your win rate from 50% to 60%, it’s better to focus on optimizing your 1:1 ratio to 1:2. The former is extremely difficult; the latter only requires a change in your trading mindset.

Before entering a trade, decide how much you’re willing to lose. For example, I decide that I will lose at most $10 on this trade. Then, look at the market—can it give me a chance to make $15 or $20? If not, I don’t trade. If yes, I enter. That’s a successful trading logic.

But I find many people do the opposite. They see a signal, enter immediately, and then think about how much they might lose while trading. The result? Losses keep expanding, stop-losses are widened, and eventually, they blow up their account.

There’s a common misconception I must mention. Beginner traders often say: “I’ve won for six consecutive days; my win rate is 100%.” Then they start increasing position sizes and trading frequency. What happens? After a month, they’re in a complete loss.

Why? Because their sample size is too small. If you only trade four times a week, your win rate will naturally be high. But that’s not your real skill level. Your true level should be measured over a month. Also, when you take short-term high win rates as real and start increasing trading frequency and position size, you fall into the trap of overestimating your ability. Your original trading logic might work at low frequency but completely fails at high frequency.

Conversely, some people think their win rate is very low, trading dozens or even hundreds of times a week, and ending up with heavy losses. My advice is: check if you’re trading too often. Restless, entering trades just because you see a signal—that’s not trading; that’s gambling. Your mind is clearly fighting itself: one side says the market will fall, the other says it will rise, and you can’t resist entering. In this situation, losing money is inevitable.

There’s also a more unusual case. Someone trades only four times a week, with a win rate below 50%, even losing three trades and winning one. This is rare, but if it happens, I’d say you’re too timid. Your judgment might be correct, but because you’re afraid of losing, you enter at the wrong points, set stop-losses too tight, and end up turning profitable trades into losses.

So, how many trades are appropriate? There’s no standard answer. But there’s one principle: don’t trade what you’re not confident about. If you don’t understand the market or don’t know whether to enter, just skip. Better to miss opportunities than to trade recklessly.

After some learning and practice, you’ll gradually find your style. Some are good at range trading, some at trend following, some at rebounds. Find what suits you best and focus on that type of trades. Your win rate and profit-loss ratio will naturally look better.

Finally, a practical tip: record every trade you make. Not to show off, but for review. Over time, you’ll clearly see your real win rate and actual profit-loss ratio. You’ll understand why you keep losing money and what kind of trades you’re best at.

Someone asked me, “Teacher, according to your theory, can I just make steady profits without losing?” My answer is: theoretically, yes. But only if you have discipline, patience, and self-awareness. Not everyone can do that. Many people understand the principle but can’t implement it because trading tests not only your logic but also your psychology.

So, before your next trade, do some calculations. Calculate your win rate, your profit-loss ratio, and then decide whether to enter. Once you develop this habit, your trading will get on the right track.