"The road ahead is long and arduous, but I will seek truth high and low." This sentiment applies not only to life but also to trading.

Many people are constantly searching for the ultimate answer to trading: What is the fundamental logic of trading?

For each individual, the answer varies. It’s difficult to pinpoint a universal trading logic applicable to everyone. However, we all share a clear trading goal: consistent profitability.

Is There Certainty in Trading?

First and foremost, we must ask: Is there certainty in trading?

Certainty refers to a scenario where, under specific conditions or patterns, the price will undoubtedly rise or fall—or the magnitude of the price movement can be accurately predicted.

But is there 100% certainty in trading? In my opinion, there isn’t. Up to this point, no theory has been able to uncover even a single instance of absolute certainty. If you manage to find one, congratulations—you’ve discovered a path to unimaginable wealth.

Since certainty cannot be achieved, the key to profitability lies in leveraging probabilities.

Because there are no patterns with absolute certainty, every trade carries inherent uncertainty. So how can we generate profits? The most logical way is to focus on probabilities.

Let me emphasize one point: high probability is not the same as certainty.

A Simple Example

Imagine you’re playing a game with a deck of 54 cards. The rule is simple: if you draw the Joker, you lose; if you draw any other card, you win.

Your odds of winning are 53/54—a very high probability. You have $100, and if you win, the opponent pays you 10 times your bet. If you lose, you forfeit your bet.

The risk-reward ratio is excellent—10 to 1. Everything seems to favor you.

Now, you decide to bet all $100 in one round. What’s the outcome? You might just be unlucky enough to lose everything in one go.

This example illustrates the difference between certainty and high probability. The strategies for dealing with each are fundamentally different.

Under certainty, strategies like capital management, stop-loss rules, and scaling in/out become redundant. But as long as uncertainty exists—even if it’s minimal—you need to establish corresponding strategies.

For instance, in the card game above, you’d need to consider betting only a portion of your total capital each time, rather than risking everything in one round.

This is the essence of trading.

If you cannot accept this principle, everything else we discuss loses its foundation.

The Importance of Stop-Loss

This brings us to the concept of stop-loss. Many people fail to understand why stop-loss is considered a fundamental trading principle. Some argue, "I don’t set stop losses—does that mean I can’t trade?"

This misunderstanding arises from a failure to grasp the core idea.

Indeed, you can trade without setting stop losses. However, if your trading system doesn’t establish stop-loss levels, you cannot determine your initial potential loss, nor can you calculate the risk-reward ratio. Without these metrics, the rest of your trading system becomes unworkable.

Thus, incorporating stop-loss into trading principles isn’t about forcing a specific approach—it’s about ensuring the system remains functional.

Two Critical Elements in Trading

Everything in trading follows a logical progression, step by step. Many traders fail to recognize this.

If we agree that profitability relies on probabilities, then two elements become crucial:

1. Win rate
2. Profit per trade

The first element is straightforward: the more you win, the easier it is to make a profit. Since certainty is unattainable, the goal is to maximize the number of winning trades.

The second element is equally important: even if you win more often than you lose, if your profits are small while losses are large, you may still end up in the red.

This is where the concept of risk-reward ratio comes into play.

Some traders adopt a mindset of "I don’t care about anything else; as long as I make money on a trade, I’m happy." But this approach can lead to catastrophic losses.

Many seasoned traders have learned this lesson the hard way: even after multiple winning trades, a single significant loss can wipe out all prior gains. This is why experienced traders emphasize cutting losses early—a rudimentary form of stop-loss.

Initially, this stop-loss is based purely on trading experience, without being integrated into a systematic framework. Over time, however, you’ll realize that pre-setting stop-loss levels before entering a trade is far superior to reacting after the fact.

Predefined stop-loss levels also make it easier to evaluate the quality of a trade.

For example, if you risk 5% of your capital but only gain 2% in profit, how would you rate this trade?
Without a predefined stop-loss, you might feel satisfied with a 2% gain. But once you understand that this 2% profit came at the cost of a 5% risk, your perspective changes.

This is the origin of the risk-reward ratio.

Once you grasp this concept, you’ll begin to reevaluate each trade. Many past trades, in hindsight, may seem questionable.

This realization marks your progress as a trader.

Key Takeaways

The conclusion is clear: profitable trades are not necessarily good trades.

Let’s summarize:

• Due to uncertainty, it’s unwise to go all-in on any single trade. This necessitates the use of position sizing techniques, which is the foundation of capital management.
• Effective capital management allows traders to better navigate market fluctuations and their own mistakes.
• To avoid excessive losses, traders set stop-loss levels for each trade, thereby controlling risk.
• To maximize returns while managing risk, traders employ strategies such as scaling into profitable positions—cutting losses and letting profits run.

These principles form the framework of a trading system. With this framework in place, we can address more specific issues.

Starting from the inherent uncertainty in trading, we’ve gradually built a basic framework for a trading system.

The Final Piece: Win Rate and Risk-Reward Ratio

Now that we’ve established the trading system framework—with personalized capital management strategies, stop-loss rules, scaling strategies, and exit strategies—what remains is finding the optimal combination of win rate and risk-reward ratio.

In my view, all trading methodologies aim to solve this problem, including methods like the Chan Theory. If you agree with the above logic, you’ll understand that the debates between different trading schools stem from differing interpretations of this issue. However, all these approaches must operate within the framework of a trading system.

Within this framework, identifying the optimal combination of win rate and risk-reward ratio that suits your style is the direction you should focus on.