How to achieve small losses and large gains in trading
To win in trading, it is often said that small losses and big profits are important.
However, there are few articles that provide concrete advice on how to achieve small losses and big profits.
In videos that use charts for explanations, they draw a line at the most recent low and another line at the target take-profit level, giving a risk-reward ratio of 1:2, and so on.
This article will explain, in a logical and proper way, how to achieve small losses and big profits.
Small losses and big profits can be rephrased as having a high risk-reward ratio. Therefore, if the profits are the same, reducing losses raises the RR.
If you don’t understand the concept of risk-reward, please refer to this ↓
【Trading】Win Rate, RR, and PF?
However, with an extremely early stop-out, the win rate will decrease.
In this article, the focus is on extending profits.
Whether the price goes up or down is basically 50%:50%, so you cannot extend profits by entering randomly.
To extend profits, it is important to capture large price moves. Therefore, you should grasp the characteristics of large trends.
Using technical indicators to probabilistically find favorable moments and holding the position for a long time there leads to extending profits.
We will give concrete examples.
In moving average cycle analysis, Stage 1 is a stable uptrend
From the top, the order is
・Short-term EMA
・Mid-term EMA
・Long-term EMA
About using three moving averages
In Ichimoku Kinko Hyo, from the upper left to the lower right,
・Leading Span
・Converted Line
・Baseline
・Leading Span 1
・Leading Span 2
This state is a stable uptrend
Misunderstandings about Ichimoku
With Bollinger Bands, aligning with -2σ indicates a stable downtrend
【Bollinger Bands①】About Standard Deviation
【Bollinger Bands②】Band-Wise and %B Chart, surprisingly little known
【Bollinger Bands③】Trading strategies using Band Walk
Just because the above patterns appear, it does not guarantee that the market will rise or fall.
However, in moving average cycle analysis, when there is a stable uptrend, it is always Stage 1.
If you want to extend profits in trading, you should find a pattern like “when this shape appears, there is a stable uptrend, and when there is a stable uptrend, this shape will always occur.”
The basic idea to find a stable uptrend is
・Short-term: a bullish bias
・Mid-term: a bullish bias
・Long-term: a bullish bias
and to use technical indicators to search for favorable timings across multiple timeframes.
A stable downtrend is the opposite, and you search for timings when bears are favored.
Of course, prices can fall even in bullish-biased moments, and can rise even in bearish-biased moments.
Because you don’t want to miss a major move, your basic stance is to stand at the entrance of stable uptrends or stable downtrends.
Trend-following strategies, by their nature, have lower win rates. This is natural, because there are few opportunities for large-scale trends.
However, if you want to stay profitable overall, small losses and big profits is a creed.
Past backtesting data of trades that achieved small losses and big profits are publicly available!
I will backtest for you: “Past 20 years of trading rules backtesting”