The trading model of "small stop-loss and large take-profit," often referred to as cutting losses short and letting profits run, is essentially the trend-following model. In this model, the stop-loss space is typically small, while the take-profit space is large, resulting in a very high reward-to-risk ratio, but a relatively low success rate.

If this model is not managed well, it can also be difficult to make a profit. The specific reasons are as follows:

1. Focusing solely on the reward-to-risk ratio without considering the success rate makes it hard to achieve profitability.

Profitability in trading is determined by two conditions: the success rate and the reward-to-risk ratio. If we only consider the reward-to-risk ratio and ignore the success rate, we cannot ensure profitability.

For example, let's assume the trading system has a reward-to-risk ratio of 4:1. The success rate must be higher than 20% to achieve profitability. In 100 trades, assuming a success rate of 21% (higher than 20%), the trading outcome would be 21 correct trades and 79 incorrect trades.

21 correct trades x 4 = 84,

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79 incorrect trades x 1 = 79,

84 - 79 = 5, which is a positive value, so we can consider this trading system to be profitable.

If the success rate is below 20%, let's say 19%, in 100 trades, there would be 19 correct trades and 81 incorrect trades.

19 correct trades x 4 = 76,

81 incorrect trades x 1 = 81,

76 - 81 = -5, which is a negative value, indicating that the trading system would not be profitable under these conditions.81 times wrong x 1 = 81,

76 - 81 = -5, which is a negative number, indicating that the entire trading system is at a loss.

In this example, the profit-to-loss ratio is 4:1, which is also a trading system that advocates for small stop losses and large take profits, but the prerequisite for making a profit is that the success rate must be higher than 20%; otherwise, the long-term outcome of the trading system will also be a loss.

When formulating a trading system, it is essential to consider these two factors comprehensively. A common mistake among many new traders is an overemphasis on the profit-to-loss ratio while neglecting the success rate. The thrill and sense of achievement from a significant profit are more substantial, so many people get trapped in this emotional loop and cannot escape.

However, when your profit-to-loss ratio is too high, it is inevitably accompanied by a very low success rate. Although a profit is satisfying, if out of 100 trades, 70 or 80 are wrong, essentially no one can withstand such pressure.

Therefore, from the perspective of maintaining a stable mindset, it is crucial to pay special attention to the balance between the profit-to-loss ratio and the success rate.

2: The trading time is too short, and it has not yet reached the stage of profitability.

Once the trading system's success rate and profit-to-loss ratio have a profitable probability advantage, to achieve profitability, you need to reach a certain number of trades to reflect the profit effect.

Using the same example, the trading system has a profit-to-loss ratio of 4:1, and the success rate is higher than 20%. Such a trading system, after 100 trades, might be correct 20 times and wrong 80 times, with a particularly uneven distribution of right and wrong trade outcomes.

This can lead to a situation where you might enter a period of decline in the trading system, experiencing consecutive losses. When you are wrong 5 times in a row, you can still handle it psychologically; after 10 consecutive losses, you start to panic; after 20 consecutive losses, your hands tremble, and you begin to doubt whether to persist; after 30 consecutive losses, your trading psychology is essentially completely shattered.So, after suffering losses several times, many people feel that there is a problem with their trading strategy, fear further losses, and thus halt their trading strategy, only to label it with a "cannot profit" stigma of having a small stop loss and large take profit. In reality, it might just be that the volume of trades is not sufficient, and they stop before reaching the stage of profitability.

3: Unreasonable position sizing.

If the issues of success rate, risk-reward ratio, and trading volume are all addressed but profitability is still not achieved, it may be a problem with money management.

Once we have our own trading strategy, the worst thing we can do is to trade with random position sizes. Sometimes, after suffering a few losses and feeling fearful, we might rush to reduce our positions, only to experience a series of profitable trades; after a few profitable trades, when confidence is restored, we might rush to increase our positions, only to enter a period of losses again. The ultimate outcome is to make small profits and suffer large losses, which is the big problem with random position sizing.

Therefore, I always emphasize that one should either use the same position size within a trading system, and if one insists on adding to positions, it is equivalent to adding a second trading strategy, which is completely independent of the original strategy. It requires consistent criteria for adding positions so that you do not end up making small profits and suffering large losses in your trades.

The above three points are the reasons why a small stop loss and large take profit cannot achieve profitability, and I believe they will provide inspiration to everyone.