One of the most important issues in trading is the margin of profit and loss we have in each trade, which we could call the win/loss ratio.
As usual with all that is related to trading there lots of opinions to that respect going from those who use a big ratio to those who use a small one, and also those who have a “flexible” approach.
When we have a small ratio is when we take small profits and bigger losses.
In this case we are looking to win more times than we lose, something very typical in the scalping community many of whom win 5, 10 or more times per each loss.
This is what we could refer to as “let losses win”.
On the other hand a system with a high ratio is looking to win a few times and have more losses having sometimes 5 or 10 losses per each winning trade.
This case would be what people call: “let profits win”.
Small ratio in trading: let losses run and cut profits short.
After having observed the markets for quite a long time I have noticed that many of those who use short-term trading prefer the cut profits short method. Their win/loss ratios are usually quite small.
This is very prevalent in the Forex market in which I can say that the majority of short-term strategies will have a small ratio.
We could see this in many of the most famous Forex social platforms, like Zulutrade or Myfxbook.
There are many cases of traders who try to use extreme small ratios with which they are able to win a lot of trades before having a loss.
Curiously enough, these kinds of strategies usually give good returns in the short-term being able to gain popularity quite quickly. After all if you can boast a 40% profit in 5 weeks you are in the right place if you want to attract customers.
It is a bit different in stocks and other markets since Forex markets are very flexible.
This is something that has consequences for the long-term.
Big win/loss ratio: let profits run
This is one the most know axioms in the world of investing, one of the commandments of the stock markets.
However, despite it, the majority of traders end up using the opposite system, that of letting losses run adopting small win/loss ratios.
It is difficult not to do it though when we are trying to do day trading.
Therefore I say that this issue of the win/loss ratio has a lot to do with the timeframe we use.
When we try to trade the markets for the long-run it does not make sense to buy a stock to sell it when it rises 2%.
The fact that the phrase “let profits run” is so popular in the trading books and community is not unfunded.
It has its reason, which is quite simple.
The best way we have to face the world of trading is by trying to catch the big moves in the markets.
In the short-term markets people spend their time looking for predictable moves.
They search for a chimera.
The alternative is trading that side of the market in which the assets trend in the long-term, especially when we have some assets that behave quite clearly in this respect.
The trading system becomes very simple then: you just need to buy those assets and maintain them for quite a time.
You can try to do “buy and hold” or try to get out before things get ugly. Both ways are legitimate.
The objective is looking for one of the big moves that some stocks have quite often, something that we will miss if we take a 3% profit.
You cannot go very far that way.
You can use this strategy for every market but it is the stock market the one that gives us better conditions.
This seems not too important but trust me, it is of the utmost importance.