Recently, I’ve been chatting with some traders and found that many people actually don’t understand a fundamental concept — the profit and loss ratio.

Let’s clarify this first: the profit and loss ratio is the ratio of the money you make each time to the money you lose. It sounds simple, but this factor determines whether you can achieve consistent profits.

For example. Suppose you have $100 in your wallet, and you only risk $10 per trade. If your win rate is 50% and your profit and loss ratio is 1:1 (making $10 profit means losing $10), then over 10 trades, you win 5 and lose 5, ending up with neither profit nor loss. But if your win rate is only 40%, with the same 1:1 profit and loss ratio, you’re in a losing position.

Here’s a key point: you don’t necessarily need to aim for a very high win rate. If you can achieve a profit and loss ratio of 1:2, then a win rate of just 40% can start generating profits. If you reach 1:3, then a 30% win rate is enough. Even if your profit and loss ratio reaches 1:5, with only a 20% win rate, you can steadily make money.

I’ve seen too many people fall into a misconception: seeing themselves win several days in a row with a 100% win rate, and thinking their skill has improved. In reality, that’s just because they’re trading too few times. Doing only 4 trades a week makes a high win rate easy to achieve artificially. What really matters is long-term statistics — monthly or quarterly data — to reflect your true level.

Conversely, some people have very low win rates, doing dozens or even hundreds of trades per day, jumping in at signals with eagerness. In such cases, no matter how good your profit and loss ratio logic is, it won’t save you.

My advice is simple: before entering a trade, decide how much you’re willing to lose. For example, set a limit of losing $10, then see if the market can give you a chance to make $15 or $20. If it can, then this trade is worth taking. If not, skip it. Stick to this principle, and your profit and loss ratio will naturally improve.

There’s also a very important habit — record every trade. Over time, accumulating data will let you clearly see your true win rate and profit and loss ratio, and you’ll understand why you keep losing money and what kinds of trades you’re good at. This is much more useful than blindly trading.