Lately, I’ve been repeatedly emphasizing the concept of the profit and loss ratio, because it really determines whether you can survive long-term in trading. Many people only focus on the win rate—yet that’s a big trap.

First, let’s get clear on what the profit and loss ratio is. Simply put, it’s the ratio between the money you make and the money you lose each time. Suppose you have 100 in your wallet, and each time you only risk 10%—which is 10. A 1:1 profit and loss ratio means you make 10 or lose 10. A 1:2 ratio means you make 20 and lose 10. That’s all there is to it.

Let me use an example to show you what’s really going on. If your win rate is only 10%, and you make 10 trades with a 1:1 profit and loss ratio, the result is: you win once and lose nine times. You earn 10 and lose 90, ending up losing 80. But if your win rate rises to 50%, and it’s still a 1:1 profit and loss ratio, then over 10 trades you win 5 times and lose 5 times—so you end up neither profiting nor losing. Go even higher: with a 60% win rate paired with a 1:1 profit and loss ratio, it’s only then that you start to see positive returns.

Here comes the key turning point. Once your profit and loss ratio improves to 1:1.5, you only need a 40% win rate to make money. If the profit and loss ratio reaches 1:2, then a 30% win rate is enough. A 1:3 profit and loss ratio? You only need a 25% win rate. The most extreme is 1:5—you only need a 20% win rate. Think about it: 20% is even lower than the requirement for flipping a coin.

That’s why I say the profit and loss ratio matters more than the win rate. Too many people are misled by a high win rate. I’ve seen a student with a 71% win rate—sounds good, right? But their profit and loss ratio was only 1:1.5, and after more than ten days, they were still breaking even—neither profit nor loss. Beginners are prone to falling into another trap: after winning for a few days in a row, they think their win rate is extremely high. But in reality, it’s only because they’re trading too few times. If you do only 4 trades a week, it’s easy to achieve a 100% win rate. But once you believe this illusion, you’ll increase your trading frequency, add more to your position size, and in the end you end up getting liquidated.

On the other hand, there are also people with especially low win rates—like losing 3 out of 4 trades in a week. In most cases, it’s because they’re too timid: they might be judging correctly, but they enter at the wrong point, and they set stop-losses too tight. Or it could be that they trade too frequently—dozens of trades a day, even over a hundred. They see a signal and get itchy to enter, and with that, their win rate will definitely be low.

So what should you do? Before entering, ask yourself: How much can I afford to lose? Suppose I’m willing to lose 10—does the market give me a chance to earn 15 or 20? If it does, then enter; if it doesn’t, then give up. This is how you calculate the profit and loss ratio. Keep a long-term record of every trade, and you’ll see your true win rate and what your profit and loss ratio really is—then you’ll understand why you’ve been losing money all along.

As you keep trading, you’ll discover what kinds of trades you’re good at. Some people are good at range trading, others are good at trend trades, and others are good at playing rebounds. Find your style, and neither your win rate nor your profit and loss ratio will look too bad. Keep this profit and loss ratio table saved properly—calculate it slowly, and you’ll find that this is exactly how it works.