When asked how to create more profit in trading, many traders will answer the most efficient way is by increasing your winnings. It seems natural that in order to improve profit one must improve winnings. However, this article will show you that the most effective way to increase profit has nothing to do with winnings, but everything to do with losses. In fact, just by decreasing your losses you will ultimately end up with surprisingly more significant profit.
Reduction in Losses:
Decreasing losses is much easier than increasing winnings and doing so results in the same amount or greater total profit and change in PnL (profit and loss). Unlike attempting to increase the winnings, decreasing the losses can guarantee that there will be an increase in profit. This table portrays the profit gained by decreasing the losses.
Decrease Total Loss:
Fig 1: Decrease total losses but total winnings remain the same.
Trading with the mindset of decreasing your losses is an efficient method.
Increasing in winning – the illusion:
This table shows the illusion of what traders think the profit outcome will be if they focus on increasing the total winnings. It is an illusion because this mindset assumes that the total losses stay stagnant.
This table portrays the profit gained by increasing winnings.Fig 2: Increase the total winnings but the total losses remain constant throughout
As you can clearly see from the table, increasing the winnings does in some cases increase the profit but it is much more difficult to do so. You can not control the market and therefore, your winnings are probably close to optimized. What you can do however, is control your losses as you can definitely control where and when you close a trade. With this being said, it is important to note that we wrote increases the winnings “in some cases.” Just because you increase the winnings doesn’t mean you’re necessarily going to make a greater profit.
Increasing in winning – the reality:
In figure 2, you can see the case where increasing the winnings increases the total profit, but there, the condition is that the losses remain the same throughout the increased winnings. In trading, we know that there is no way to ensure that the losses stay the same.
Fig 3: Increase total winnings but the total losses change throughout
Figure 3 shows what happens when you increase the winnings while also facing differentiating losses in each case; a much more likely situation. As you can clearly see even increasing the winnings by 10,000 from 70,000 to 80,000, results in the same total profit of 15,000. Lastly, in the 4th case on chart two B, you can see that even increasing the winnings by another 10,000 from 80,000 to 90,000 actually results in a loss in total profit from the previous 15,000 to the current 10,000 as the loss increased as well.
Through looking at these three cases it becomes apparent that trading with the mindset of decreasing your losses is a much more efficient method. The real leverage is in risk management. Only by ensuring that your losses are as small as possible can you ensure that your total profit is as large as possible. After all, you can control your losses much better than you can control your wins.