Short-term trading must slightly increase the win rate because the frequency of transactions is very high, with frequent opening and closing of positions. Traders who engage in short-term trading are generally under more mental stress. If the success rate is low, their mindset can easily collapse, which is an important premise.

Of course, having a high win rate alone does not guarantee that your trading strategy will be profitable. Profitability in trading also depends on the risk-reward ratio, and it is the combination of these two that can lead to profits. Short-term trading strategies have a relatively short holding period, with quick entries and exits, and typically do not have a particularly high risk-reward ratio. Here is a risk-reward ratio idea for short-term trading: it should not be lower than 1:1, nor higher than 3:1. Ratios of 1:1, 1.5:1, and 2:1 are all viable.

Below 1:1, closing a position as soon as the market starts moving is a bit of a waste of the market movement. Above 3:1, the holding period becomes longer, and if the market does not move in the desired space within a short time, the short-term trade turns into a swing trade.

Let's move on to discuss position management strategies.

Strategy 1: Aggressive short-term position strategy.

For short-term trading with a certain win rate, there is a clear characteristic in the distribution of trading outcomes, which is a high frequency of trades with a low consecutive error rate. In other words, the number of times you take profits should be more than the number of times you cut losses.

Advertisement

This distribution of trading outcomes can be managed with a more aggressive position management method, such as using the Martingale strategy to manage positions.

For example, let's assume the trading system has a risk-reward ratio of 1:1, and the maximum consecutive error rate is 5 times. After 5 consecutive losses, there will be one profitable trade. The maximum consecutive error rate can be derived from backtesting the trading system, and this strategy requires trading with a fixed amount of stop loss.

Let me break it down in detail so you can understand what it means.

(1) Suppose the stop loss amount for the first trade is 10. If the first order is wrong, the account will be in a loss of 10 at this point.(2) The stop-loss amount for the second order remains at 10. If the second order is correct, a profit of 10 is made, which compensates for the loss above, resulting in no overall loss for the account. If the second order is stopped, the account will have a total loss of 20.

(3) The stop-loss for the third order is adjusted to 20. If the third order is correct, a profit of 20 is made, which compensates for the losses from the previous two orders, resulting in no overall loss for the account. If the third order is stopped, the account will have a total loss of 40.

(4) The stop-loss for the fourth order is adjusted to 40. If the fourth order is correct, a profit of 40 is made, which compensates for the losses from the previous three orders, resulting in no overall loss for the account. If the fourth order is stopped, the account will have a total loss of 80.

(5) The stop-loss for the fifth order is adjusted to 80. If the fifth order is correct, a profit of 80 is made, which compensates for the losses from the previous four orders, resulting in no overall loss for the account. If the fifth order is stopped, the account will have a total loss of 160.

(6) The stop-loss for the sixth order is adjusted to 160. Since the maximum number of consecutive incorrect trades is only five, the probability of taking profit on the sixth trade is almost 100%. A profit of 160 on the sixth trade compensates for the losses from the previous five trades, resulting in no overall loss for the account.

Such a strategy in trading allows all stop-loss amounts to be compensated by the Martingale strategy, ensuring an overall profit in the end.

However, there are two critical issues that must be taken seriously when doing this:

First, the stop-loss amount for the initial first trade must be small; otherwise, with continuous doubling, the position will become very heavy, and the trader will face significant psychological pressure, which may even lead to a loss of execution power, causing the strategy to fail.

Second, the number of consecutive incorrect trades in the trading system is the core when using this position strategy. It is essential to review various historical market conditions extensively to obtain accurate consecutive error data and use reasonable positions based on that data.

Strategy 2: Achieve greater profits by compounding positions.Engaging in short-term trading with a certain rate of success, this trading strategy has another distinct feature: a relatively short decay cycle. It can weather the decay in a short period of time, and the distribution of the decay and profit cycles is quite balanced. After a brief period of losses, a period of profits will follow, making it very suitable for using a compounding position.

Let's illustrate this using a fixed stop-loss amount for position management.

Suppose it's a trading account of 100,000 yuan, with an initial position of a stop loss of 1% per trade, which is 1,000 yuan. When the account makes a 10% profit and the principal reaches 110,000 yuan, the percentage remains 1%, but due to the increase in principal to 110,000 yuan, the amount becomes 1,100 yuan.

Because the decay cycle is relatively short, even if the position increases, the overall drawdown is not significant. With 1,100 as the base, during the profit cycle, a larger profit can be obtained, and the principal can grow more quickly. Adjust the stop-loss amount every time the principal increases by 10%.

By continuously adjusting in this way and using compounding, trading will gradually yield very high profits.

Note: The true power of compounding trading is manifested in the later stages when the principal has accumulated to a certain extent. Traders must be patient and consistently execute their trading strategy.

Of the two strategies mentioned, the first one is more aggressive and has higher psychological demands on the trader, so it should be used with caution in practice. The second compounding strategy is relatively more moderate, with lower risk and stronger feasibility. It is recommended that friends without a strong heart may opt for the second strategy.