In trading, break the curse of "small profits and big losses"
During the trading process, it is often observed that many people find that ten profitable trades are not enough to offset a single loss, and ultimately, the funds in their hard-earned trading accounts are still on a downward trend. So, how can we break the strange phenomenon of funds being gradually depleted in the "small profits, big losses" cycle?
Why does the situation of small profits and big losses always occur?
Many traders will go through the phase of "small profits, big losses" when they enter the market. The reason is that they cannot hold onto profits but can withstand losses! Whether it is trading stocks or dealing with futures and foreign exchange, a common rule is that people like to take profits when they make money, as there is an innate human desire for security and the need to secure gains. When losses occur, they prefer to hold on, hoping for a market reversal and an early recovery of their capital. Or they may increase their positions in the same direction, praying for a reversal that would allow them to break even, only to end up in a heavily loss-making trend, resulting in significant losses.
Because it is a result of human nature, small profits and big losses are an inevitable high-probability event. How can we break this vicious cycle? Perhaps some insights can be gained from the perspective of position management.
How to effectively manage funds?
Position management, also known as "fund management," is an art of defense that ensures you are in an unbeatable position before embarking on the path to victory. The purpose of position management is to cut losses and let profits run. To achieve this goal, some principles need to be followed:
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1. Never invest all your capital in the market. Especially for beginners or those who are long-term in the "small profits, big losses" state, investing all capital in the market will not only magnify losses but also affect the trader's mindset to a certain extent. Of course, short-term traders can attempt to go for heavy positions with a firm stop-loss and a reasonable profit-to-loss ratio, but it is crucial to ensure that the same standard of entry opens the same position size; otherwise, there is a risk of being in a light position when profitable and a heavy position when losing.
2. It is normal to experience occasional consecutive losses in trading, and position management must ensure that after consecutive losses, the remaining capital can still open the same number of positions. If this principle cannot be followed, it is very likely that you could go from being able to open 100 positions to only being able to open 90 positions after a few consecutive losses. Recovering the capital to its original level with 90 positions will be more challenging than with 100 positions.
3. There must be a scientific strategy for adding or reducing positions. Although trading is a game of probability from a mathematical perspective, it is by no means a static model. The ever-changing market may present opportunities to add or reduce positions after our initial entry, and at this time, your win rate and profit-to-loss ratio are also changing. This requires your position management to include the content of adding or reducing positions.
Three popular fund management modelsThere are various models for capital management, including fixed and flexible lot sizes, fixed capital, fixed risk ratio, fixed volatility capital management, and so on. This discussion will focus on the three most popular ones: the fixed, flexible lot size model, and the fixed risk ratio model.
Fixed and Flexible Lot Sizes
The fixed lot size position management model can be considered a simple and easy-to-understand entry-level tool. As the name suggests, a fixed lot size means that the number of lots for each trade is constant. That is, you first define a position size, and regardless of the amount of available capital or whether the account balance is increasing or decreasing, the number of lots for each trade must remain the same.
This capital management model is straightforward and does not require complex calculations, but it has two issues: when the account balance is continuously decreasing, maintaining the set lot size for each trade may increase the loss amount and even lead to a margin call; moreover, since each profit and loss amount is comparable, each drawdown could potentially cause the trader to give back all previous profits, resulting in a very slow growth of the capital curve.

Due to the aforementioned issues, a flexible lot size model can be adopted in practice. A flexible lot size refers to calculating the position size based on the total account capital, with more lots opened as the account capital increases and fewer as it decreases. For example, assuming an initial capital of $1 million, with an initial decision to trade 10 lots of gold futures each time, for every $500,000 increase/decrease in capital, the number of lots traded each time would increase/decrease by 2. This model carries certain risks, but it can prevent capital from disappearing quickly during periods of low losses and maximize profits during significant market movements.
Fixed Risk Ratio
A fixed risk ratio involves setting a limit on the loss risk ratio for each trade. For instance, if the ratio is set at 3%, then each trade is only allowed to face a potential loss of 3% of the account capital. The setting of this ratio depends on the maximum loss amount the trader can tolerate, and of course, this figure can be adjusted appropriately based on historical maximum losses and average losses, rather than being arbitrarily fabricated. Most traders adopt this capital management model in practice because it effectively controls the maximum loss risk, prompting traders to pay attention to and closely monitor risk.
When managing positions, the best scenario is to follow the pre-designed management model without any subjective factors. This is easier said than done. So, what should be done? There are no shortcuts; it involves making the position management strategy and the other parts of the matching trading system as detailed as possible, leaving no room for subjective speculation. Remember! Rules still rely on discipline for execution!
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