In futures trading, the result of each trade is either a profit or a loss, as well as the difference in the amount of profit and loss. However, if we broaden our perspective and analyze all trade results together, what conclusions can we draw? The probability of profit and the probability of loss become very important indicators for us to pay attention to.

The concept of the probability of profit is relatively easy to understand, which is the number of profitable trades divided by the total number of trades. Some friends attach great importance to our probability of profit, also known as the win rate, believing that the higher the win rate, the better. This is not wrong, but if we don't consider the overall profit-to-loss ratio, the win rate alone does not have practical significance.

The profit-to-loss ratio is an important concept in trading, but it seems that most people's understanding is still limited to using "horizontal support and resistance" to plan the values of take profit and stop loss.

In my opinion, the profit-to-loss ratio cannot be simply represented by subtracting stop loss from take profit, as if having a positive value can justify a trade.

On the contrary, its essence is extremely complex, and it should not be simply about addition, subtraction, multiplication, or division, but should rather reflect the important judgment criteria of probability, expected profit, and trade value.

In other words, the essence of the profit-to-loss ratio is not "odds" but "opportunity."

This is a core indicator that beginners may not know about, but experienced traders attach great importance to. Let's use a formula to understand why the profit-to-loss ratio is so important.

Profit = (Win rate × (Profit-to-loss ratio + 1) × Trade frequency × Risk level

In the formula, the maximum value for the win rate is 1 (i.e., 100%). Trade frequency involves the trading cycle and the number of instruments, while risk level involves position size. Once these two parameters are determined, they are generally relatively fixed. Now let's look at the profit-to-loss ratio. This parameter is the average profit amount divided by the average loss amount, and the resulting value will often be far greater than 1, which means that this parameter plays a decisive role in the profit.

For example, if I make an average profit of 10,000 yuan each time, and an average loss of 1,000 yuan each time, then the profit-to-loss ratio = 10,000 yuan divided by 1,000 yuan = 10. By plugging in a profit-to-loss ratio of 10 into the profit formula, we find that as long as the win rate is 10%, we can make a profit. What does a 10% win rate mean? It means that if you buy 10 stocks, 9 of them lose money, and then you find that your account is profitable.

What is the essence of this industry? It is to exchange risk for return. Why do many people think that losing money is not good? It's because they haven't realized this essence. Even if you open a breakfast shop, everyone knows that rent, utilities, and labor are all costs. However, in the trading industry, many people do not have a sense of cost. In fact, your losses are your costs, and the profit-to-loss ratio reveals the essence of this industry, which is your ability to make money with your costs!

Let's analyze how to measure the level of trading skills. On the surface, it's about whether you have made money, but at a micro level, it's about how well you time the market!

What is the logic behind timing the market? It's about maximizing the profit-to-loss ratio! A good skill means being able to get a good entry and exit point. The biggest advantage of a good entry point is a small stop loss, and because of the small stop loss, you can have a heavy position without increasing the risk exposure. Similarly, a good exit point can lead to a good profit-to-loss ratio.

Precise and skillful techniques are more likely to achieve a good profit-to-loss ratio. We often see people showing off their trades and how much money they've made, but in reality, you don't know how much cost they incurred to achieve that profit. In a true trading record, the profit-to-loss ratio is an important indicator. The most crucial content in this table is not the profit, but the profit-to-loss ratio. When it comes to showcasing skills, the most satisfying trades are often not the ones that make the most money, but the ones that achieve the greatest returns with the smallest risk exposure. A true master of technical trading, like a surgeon with a scalpel, can find the most favorable entry points in the details of each cycle. Instead of arguing about who is better, let the profit-to-loss ratio speak for itself.

Many individual investors are unable to enter the trading arena simply because they lack a guide. Sometimes, a single piece of advice from an experienced person can solve the problems you've been pondering. Daily real-time market analysis of currencies such as BTC, ETH, BCH, LTC, EOS, XRP, DOT, etc., is promptly shared in the social circle, and there is also a group for experience exchange and guidance, with real-time guidance available 18 hours a day. Feel free to scan the code to add and get real-time guidance. Note! The contact information below does not belong to me!

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