Most retail investors lose all their money not because they “can't predict the market,” but because they win too frequently.

The fastest way to go bankrupt in this market is to have an 80% win rate.

My friend made 23 contract trades this month, 18 were profitable, a 78% win rate.
The result? Total return: -10%.
18 wins, each +5%, total +90%.
2 losses, each -50%, total -100%.

This is how 99.9% of retail investors die: 18 small wins, 2 big losses, account goes to zero. How do you become the remaining 0.01%?

1. Why does “small wins, big losses” happen?

This isn’t your fault, it’s a design flaw in human nature.

In psychology, there’s something called Prospect Theory.

Simply put:

When facing gains, people tend to avoid risk,
→ As soon as they make a little, they want to cash out, afraid the profits will disappear.

When facing losses, people tend to take risks,
→ When losing, they hold on, thinking “What if it bounces back?”

So the underlying logic of retail investors is:
• +5% floating profit, want to sell
• -20% floating loss, still holding
• -50% floating loss, even less likely to sell
The end result is always the same: small wins, big losses.

My friend's 23 trades are a classic example of this human nature:

Winning trades (18): sold as soon as each hit +5%
SOL up 5%, sold
ETH up 7%, sold
BTC up 4%, sold
... average each +5%

His logic: “Take profits when you get them, stay safe.”

Losing trades (2): only cut at -50% (not by choice, but by forced liquidation)
Altcoin dropped from 0.8 to 0.4, -50%, forced liquidation
Another dropped from 1.2 to 0.6, again -50%
Logic: “Already lost so much, maybe it’ll bounce back.”

Result is simple: +90% (18 times), -100% (2 times) = -10%

It’s not that he can’t predict the trend, he has an asymmetric risk/reward.

2. How do institutions exploit this bug?

Institutions aren’t smarter, they just understand human nature better.

Retail investors have three traits:
Trait 1: Take profits too quickly
Up 5%, greed turns to fear: “Should I sell? What if it drops back?”

Institutions exploit this:
→ Pump price 5–8%, retail collectively take profits
→ Then pump another 30%
→ Retail miss out
→ Chase back in at highs
→ Institutions dump

Retail get 5%, institutions get 25%.

Trait 2: Hold onto losses
Down 5%, “Normal, wait”
Down 20%, “Already lost so much”
Down 50%, “If I sell, it’s a real loss anyway”

Institutional play:
→ Slow, steady drop, making you think it’ll bounce back
→ Wait until retail are numb, then crash it suddenly
→ Retail panic sell at the bottom
→ Institutions buy at the bottom

Trait 3: Adding to losing positions. This is the deadliest psychology.

Retail down 20% will add more: “Cheaper now, averaging down.” Keeps dropping, keeps adding, until total blowup.

Institutions know you’ll do this, so the trap is set for you.

3. Solution: 2:1 risk/reward ratio principle

To break the cycle, you only need one rule: for every trade, risk/reward ratio ≥ 2:1

What does that mean?
You’re willing to risk -5% to try for +10% profit.

Even if your win rate is only 50%, you’ll make money in the long run:
10 trades
• 5 win +10% → +50%
• 5 lose -5% → -25%
Net return +25%

And my friend?
His risk/reward ratio: 5% ÷ 50% = 0.1:1
No matter how high the win rate, it won’t help.

4. How to execute? Three steps

① Set risk/reward before buying

Ask yourself 3 questions:
If I’m right, how much do I make? (take profit)
If I’m wrong, how much do I lose? (stop loss)
Is risk/reward ≥ 2:1?
If not → Don’t do it.

② Always set automatic take profit and stop loss

Don’t trust “gut feeling.”
Don’t trust “willpower.”
Human nature is unreliable, only systems are trustworthy.

You need the exchange to:
• Take profit automatically at set price
• Stop loss automatically if price drops

Even if you’re asleep, your strategy is enforced.

Just this step can turn losses into gains.

③ Record the risk/reward of every trade

Record:
How much bought
How much sold
Profit/loss percentage
What’s the risk/reward

After a month, you’ll find out:

Are you:
A. Small wins, big losses (most retail)
or
B. Profitable long-term (the few)

The data doesn’t lie.

5. Three common questions

Q1: What if the price bounces back after I stopped out? Totally normal.

It means you got the direction wrong, not that the market is wrong.

The point of stop loss isn’t to avoid all losses, but to avoid one loss wiping out all your profit.

Q2: What if it keeps going up after I took profit? You just made less, not nothing.

“Making less” is always better than a big loss.

Q3: If I only have $10,000, do I still need risk/reward?

The smaller your capital, the more you need risk/reward.

One big loss can wipe out your whole account.

6. Final words

My friend reviewed his 23 trades. If he had always used risk/reward ≥2:1:

• 18 trades +10% → +180%
• 2 trades -10% → -20%

Net return: +160%; instead of today’s -10%.

Same trade direction, same win rate,
the only difference is risk/reward.

The core reason retail loses isn’t bad predictions, but not understanding risk/reward.

Once you understand risk/reward, win rate doesn’t matter as much.

My 3 recommendations:
✔ Never take trades with risk/reward < 2:1
✔ Use automatic take profit and stop loss, don’t rely on willpower
✔ Record and review risk/reward of every trade

This is my 10th article on trading methodology.

If you found it useful, feel free to share.

Let more people know: the essence of trading isn’t how many times you win, but how much you win each time.

Let’s discuss: What’s your risk/reward ratio?

A. Don’t know, never calculated
B. <1:1 (small wins, big losses)
C. 1:1
D. ≥2:1 (profitable long-term)