Frequency is the Fundamental Factor That Determines Everything

Short-term, it acts like a voting machine; long-term, it acts like a weighing machine.

The Higher the Trading Frequency, the Closer the Trade is to a Zero-Sum Game

The result of frequent trading is the accumulation of transaction fees, which eventually devours all your profits and principal.

The shorter the prediction, the closer it is to a coin flip;

the longer the prediction, the closer it is to true logical deduction…

Therefore, the essence of reducing trading frequency is rejecting the coin flip and adhering to logical deduction.

Risk-Reward Ratio

The Risk-Reward Ratio (or Return-Risk Ratio) is a crucial concept in investing and trading, used to measure the expected return for every unit of risk undertaken. It reflects the relationship between the risk and the potential return of a trading opportunity or investment decision.

Risk-Reward Ratio = Potential Return ÷ Risk Taken

Potential Return: Refers to the target profit, which is the amount you hope to gain from the trade. For example, if you buy a stock and expect it to rise to a certain price, you calculate the difference between that price and the purchase price.

Risk Taken (or Assumed Risk): Refers to the maximum possible loss you are willing to bear, usually determined by the stop-loss price. For example, after buying a stock, you set a stop-loss price and calculate the difference between the stop-loss price and the purchase price.

  • Challenges when Trading Frequency is High: Frequent trading causes the “Risk-Reward Ratio” of each trade to become lower. This is because the probability of achieving a massive return in a short period is very low. Even if the market occasionally experiences violent fluctuations (sharp rise or sharp fall), attempting to capture this volatility carries extremely high risk—like “picking chestnuts out of the fire”—making losses likely.

  • The Concept of Risk-Reward Ratio: The Risk-Reward Ratio refers to the potential return generated per unit of risk. If trading frequently, the potential return of each trade is often insufficient, while the risk always exists, making it difficult to improve the ratio.

The Significance of Proactively Reducing Trading Frequency

Proactive vs. Passive:

Proactively reducing trading frequency is an action where the trader controls the pace themselves, indicating that the trader is managing the market rhythm rather than being dragged along by short-term market fluctuations. Conversely, “unconsciously frequent trading” is a passive reaction driven by market sentiment, usually manifesting as the trader fearing missing out on opportunities (FOMO) or rushing to chase short-term volatility.

How to Improve the Risk-Reward Ratio:

Proactively reducing trading frequency actually improves the Risk-Reward Ratio indirectly:

  • Risk (Denominator) remains unchanged: The risk you bear has not increased.
  • Return (Numerator) increases: By reducing frequency, you focus on opportunities with greater potential, increasing the expectation of potential returns.