We all say that to truly do something well, one must understand the essence of the matter, grasp its fundamental logic, and only then can one remain unchanged to meet the ever-changing, and do well in any situation.

This is like taking an exam. Before the exam, we practice with questions, but the pool of questions is infinite; it is impossible to go through them all. Only by understanding the basic logic of the mother question can we deduce the answers to different branches of the question when the types of questions change unpredictably.

So today, let's explore the "mother question" of the exam of trading, and discuss what the essence of trading really is, and what the basic logic of profit should be?

What is the essence of trading?

As the term implies, trading is the exchange of goods for goods.

In the early days, we exchanged money for goods, and this type of commodity trade was called trading. Later, with the emergence of financial markets, we used money to buy and sell stocks, futures, foreign exchange, and these actions were also called trading.

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So trading means exchange; if you want to make a profit, you have to exchange something for it, and what do you exchange? A certain amount of risk.

For example, when we buy and sell stocks with money, if the stock price rises, we make a profit; if it falls, we incur a loss. Here, we bear the risk of potential loss in exchange for the hope of making money. Moreover, risk and profit are directly proportional; the more money you want to make, the higher the risk you need to take.

Therefore, the essence of trading is to exchange risk for profit, and the risk is directly proportional to the profit.

Many people completely ignore the risk when trading, thinking that trading is a sure thing, which shows that these people have not understood the essence of trading. This is also the reason why many people suffer severe losses.In the early stages, I felt that the financial market was littered with gold. I had a cursory understanding of candlestick charts and had not systematically learned any trading knowledge. I had no reverence for the market, nor did I have a psychological expectation of potential losses (most people do not think they will lose money before entering the market). As a result, my trading was very random, following my feelings, and in the end, I lost a lot.

That's why I always say that in trading, risk comes first. Ensure that you do not lose money before considering making a profit. The expectation of risk is extremely important.

If you are at the beginning stage of trading, or if you are already in a losing phase, you can stop and seriously think about the essence of trading. Recognize and understand it clearly, know to treat risks cautiously in trading, and then start trading.

So, what is the essence of making a profit in trading?

As I mentioned above, only with a sense of risk can there be the possibility of making a profit. The essence of truly making a profit in trading must not be to never lose, but rather to have profits greater than losses, and to achieve overall profits in the long term, which is the true profit.

The chart shows two schematic diagrams of trend line break trading. On the left, after the market broke downward, it began to fall, and this was a successful profitable trade. On the right, after the market broke downward, it did not fall but rose after a period of consolidation, and this was a losing trade with a stop loss.

Even when using trend line trading, sometimes it is successful, and sometimes it fails. No technical indicator is 100% effective; they all have a probability of success.

So what we need to do is to trade according to a unified technical standard, and ultimately achieve long-term profits in trading through the advantages of success rate and reward-to-risk ratio.

For example, a trading system with a 40% success rate and a 2:1 reward-to-risk ratio, with 100 trades, 60 wrong and 40 right. If the profit is 200 yuan when right, then the overall profit is 40*200 - 60*100 = 2000 yuan.

Many people fall into a mental quagmire, thinking that they will definitely make money, will definitely not lose, and that losses are not supposed to happen. Therefore, they are always committed to finding a perfect indicator, a perfect trading strategy that can be invincible and have no losses at all. This mindset is completely wrong and the most dangerous.So, when we understand the nature of trading and the basic logic of making profits, we will know where to focus our attention and not go astray. I hope this article can inspire you.