Trading Concepts Handbook (Part 7): The Correct Starting Approach for Small Capital

The Trading Concepts Supplement Series aims to share some “rarely mentioned but extremely important” trading concepts. I believe that regardless of whether you are a Newbie or a Crypto Veteran, you can take something away from this series of articles. This series consists of a total of 10 articles, and this is the 7th. (Recap: Trading Concepts Supplement (Six): Goal Management and Benchmark) (Background Supplement: Trading Concepts Supplement (Five): How the Visual Taker Strength Indicator CVD Helps You Identify Direction) Because I have little capital, do I have to go all out? Let me conclude: this is a wrong concept. In the financial market, unless the principal is large enough to affect the market, 1,000 U and 1,000,000 U are essentially pursuing the “Expected Value” of the strategy when trading. The formula for expected value is simple: “the sum of all possible outcomes multiplied by their corresponding probabilities.” For example, there is a lottery ticket with a 70% chance of winning nothing, a 20% chance of winning 500 U, a 9% chance of winning 1,000 U, and a 1% chance of winning 10,000 U. Expected Value = 70% * 0 + 20% * 500 + 9% * 1,000 + 1% * 10,000 = 290 U. If the price of this lottery ticket exceeds 290 U, you will lose in the long run. Think about it. Therefore, many retail investors believe that having little capital means they should “go big,” which is a reasonable thought process, but what most people easily overlook is that in this “going big” process, the expected value is likely not positive. Therefore, the mindset of small capital going for explosive gains is not problematic in itself, but one should not treat explosive gains as “gambling”; otherwise, just head straight to Vegas. Moreover, the win rate of explosive gain strategies is usually very low. If you cannot guarantee a sufficiently high win-loss ratio, even if you hit a big win, it may not cover previous losses. The Power of the Market If your principal is only 1,000 U and you want to earn another 1,000 U, you can: 1. Work a job 2. Profit through the financial market First, part 1 is very simple; you can achieve your goal in a few months at most. But what about part 2? To earn another 1,000 U with 1,000 U, you must achieve a 100% performance. Do you remember what was said in the last article? The average annual performance of investment guru Warren Buffett is only about 20%; the average annual return of the U.S. stock market S&P 500 is only about 10%. It is these seemingly insignificant 10% and 20% that are unattainable numbers for most fund managers. Therefore, when the principal is small, the fastest way to accumulate assets is usually through “working a job” rather than “through the financial market.” If the principal reaches 1,000,000 U, the situation is completely different; simply working a job to earn another 1,000,000 U becomes significantly more difficult, and at this point, the power of the market can be utilized. Compound Interest Remember one thing: “If you do not plan to force yourself to retire within a year, you do not need to rush.” Suppose Xiao Ming entered society and saved 20,000 U in capital over 3 years. At the age of 25, he invests 20,000 U in the S&P 500 or Buffett's company stock. The table above, created with the help of GPT, shows the multiples. For example, if my initial capital is 100 U, with an average annual return of 30%, after investing for 5 years, it will grow to 371 U. If Xiao Ming invests in the S&P 500 with an average return of 10%, this 20,000 U will grow to 32,200 U by the time he is 30 years old; this 20,000 U will grow to 51,800 U by the time he is 35 years old. Note: “This is under the assumption that he does not save any additional money or invest more capital during this period.” Additionally, the growth part is the reward he can obtain without needing to invest extra effort. So what if: he buys stocks of Buffett's company? What if he buys BTC? What if he continues to add more capital and invest continuously? If you were born after the 90s or even after the 00s, give yourself 10 years to save a sum of capital and then start continuously investing… “Do you still think it's too slow?” Summary Do not treat the market as a casino. Even though the Crypto market has many myths of getting rich, there are many more unseen corpses; what can be seen is not necessarily replicable. Set goals, give yourself 10 years, and perhaps it will be much faster than you think. The above is the content of Trading Concepts Supplement (Seven). I hope it helps you all, and thank you for reading this far. Original link: Related Reports Interpretation of the 6 Current Situations in the Web3 AI Track: Compared to AI Agents, institutions are more concerned about infrastructure. AI Agents merging with Web3, are Bots going to revolutionize on-chain financial management? Complete introduction to Mind Network: Using FHE technology to crack the safety dilemma of AI Agents. <Trading Concepts Supplement (Seven): The Correct Starting Approach for Small Capital> was first published in BlockTempo, the most influential Blockchain news media.