16. The correct way to increase risk/reward ratio…

People who enter trading markets are never lacking in pain, because pain is flying all over the place. So what they really lack is just one thing:

Reflection

With both pain and reflection, progress must result. So if novices want to escape from the fate of leeks, they must reflect every moment of every day, and after they reflect they still must reflect again.

You are entering a place with risk, and here there are almost no certain returns, so what should you do? Or, to put it another way, “how can you correctly decrease your risk/reward ratio”?

risk/reward ratio = Potential risk ÷ Potential reward

What profound theories can be derived from such a simple equation? Staring at something for a long time and letting your imagination run wild for a long time is the only way to do so-called “deep thinking”. Just as we can start to see patterns that we couldn’t see before if we stare at the ceiling for long enough, all deep thinking is the result of staring at something for a long time. This was the process for Descartes inventing the Cartesian coordinate system — if you’re interested, go to a search engine and look up Descartes’ story.

Looking at the equation, you can see that there are only two ways to decrease risk/reward ratio: either increase the denominator, or decrease the numerator

Here are some feasible methods to reduce the numerator:

Adjust the stop-loss line, reducing the amount of risk you carry;

Reduce the amount of each trade relative to overall assets;

Increase your ability to earn money outside of the market (or increase fundraising ability).

Are there any more? Think about it. Each of these items is worth adjusting your own behavior.

And to increase the denominator? What are some workable methods?

Choose higher quality trading targets;

Choose the most opportune times to trade (for instance, buy after several steep falls in price);

Increase holding time (for instance, crossing one or more bull/bear cycles).

Everyone has different preferences, everyone has a different history, and everyone has different desires, so there is no standard answer here, and the three items listed above for each are not necessarily a complete list. As for me, I have limited ability, so in the end I just listed these three that had meaning. So, I could only make choices in the range of my ability.

Finally, this was my choice:

To reduce the numerator, I think of ways to increase my ability to make money outside of the market, and I treat money that I put in the market as if I’ve lost it…

To increase the denominator, I don’t make moves after I buy, no matter what the price does, and cross through multiple bull/bear cycles…

After many years passed, I discovered that making this choice at that time had a prerequisite:

My daily expenses were fairly average, I generally didn’t spend that much money, and before entering the trading markets I was already a relatively affluent member of the so-called “middle class”. This meant that when I entered the market, my threshold for desiring to “cash out” was relatively high, or “extremely high”, so it created a virtuous cycle. The denominator got larger and larger, and the numerator got relatively smaller and smaller.

In any case, your goal is very clear: when your denominator gets relatively large enough, you are no longer a “leek”, because you have escaped the “curse of the leek”. How do you escape it? It depends on your choices. Once you’ve done it, go and tell those “leeks” about it. Will they believe you? Let me tell you from experience: They! Will! Not! Believe! Why? You’ll know when the time comes.