Written by: 4Alpha Research
Most veterans with more than five years of trading experience can deeply understand that they often rely on intuition to trade in the early stage, but frequent losses make them realize that intuition is far less stable than the system. Intuition will magnify people's weaknesses, and the weaknesses in human nature are something we cannot completely overcome. The only way to regulate them is through the system. If you are a novice and still rely on inspiration to trade, then now is the time to start building your own trading system!
There is no trading system that is guaranteed to make money
The trading system is actually a set of operating systems. When placed in a computer, it can be understood as a complete human-computer interaction system. People use this system to make the computer work; from a biological point of view, it is similar to a conditioned reflex, that is, "when signal A appears, action B must appear."
A trading system is a set of complete signal rules for entry, exit, stop loss and take profit of buying and selling
There are many misunderstandings about trading systems. Some people believe that the reason they cannot make a profit is that they lack their own trading system, and once they have a trading system, they can make a profit. Others believe that the reason for not getting excess returns is that their existing trading system is not good enough, so they need to find a better system. Others firmly believe that there is a magical trading system in the world, as long as you follow it, you can make a profit without losing.
Are these views true and credible?
First of all, it should be clear that there is no "perpetual motion machine" or "elixir of life" in the world, and naturally there will be no universal and always stable and profitable trading system. If such a system exists, smart people would have discovered and used it long ago.
Secondly, even if you have an excellent trading system, it does not mean that you can achieve stable profits. An excellent trading system first requires users to have strong execution capabilities and be able to follow its instructions 100%. In addition, a good trading system is not necessarily suitable for everyone. Everyone needs to find a trading system that suits them, which cannot be measured by standardized "good" or "bad".
To find a trading system that suits you, you first need to correctly understand and position the role of the trading system.
The trading system is similar to military guiding ideology. Completely following these guiding ideologies may not guarantee victory in every battle, but at least it can ensure that there will be no disastrous defeat and leave subsequent opportunities. The trading system is at the strategic level, while the combination of "operational thinking" and "operational strategy" belongs to the campaign level, and the specific trading actions are the performance of the tactical level.
By correctly understanding the role and limitations of the trading system and finding a suitable system based on your own characteristics, you can achieve better results in trading.
So how do you evaluate an operating system?
When evaluating a trading system, I think you only need to focus on one core key indicator, namely the "profit-loss ratio". The so-called profit-loss ratio refers to the average amount of profit divided by the average amount of loss.
For example, you invest 1 million yuan and trade 10 times according to a certain operating system. Among them, you make profits 4 times, with profits of 150,000 yuan, 250,000 yuan, 350,000 yuan and 450,000 yuan respectively; you lose 6 times, with losses of 100,000 yuan, 150,000 yuan, 100,000 yuan, 50,000 yuan, 70,000 yuan and 200,000 yuan respectively. At this time, the average profit when profitable is 300,000 yuan, and the average loss when losing is 111,700 yuan. The profit-loss ratio is 30/11.17 ≈ 2.69. If you use this trading system to trade continuously, whether it is 100 times or 1000 times, according to the profit-loss ratio of 2.69, theoretically, you can achieve profit. A profit-loss ratio below 1 means a loss.
However, when evaluating objectively, we need to consider certain redundancy factors. Personally, I think that the profit-loss ratio should not be lower than 2 in any case. Specifically:
A profit-loss ratio of 3 can be regarded as passing, that is, 70 points;
A profit-loss ratio of 4 can be regarded as good, that is, 80 points;
A profit-loss ratio of 5 can be regarded as excellent, that is, 90 points;
A trading system with a profit-loss ratio higher than 5 can be regarded as full marks.
It should be noted that trading systems with a profit-loss ratio higher than 5 are very rare. It is recommended that you calculate the profit-loss ratio of the trading system (or buying and selling rules) that you have adhered to for a long time in order to better evaluate its effectiveness.
What elements should be included in the design of an operating system?
Before establishing an operating system, we should first ask ourselves, what is the purpose of investing? Is it to get rich overnight? Is it steady appreciation? Or rapid appreciation? In addition, what is the expected rate of return? Is it 100% in a year? Is it 100% in a month? Is it 30% in a year? Is it 30% in a month? Is it 200% in a year? Or 50% in a year? These questions will greatly affect how we design our own operating system.
In addition, what is our tolerance and risk appetite for risk? Can we tolerate a large drawdown of more than 30%? Can you tolerate a small retracement of less than 20%? Can you only tolerate a slight retracement of less than 5%? Or can you not tolerate any retracement at all? These are also several questions about risk that must be considered. If you don't figure these out, it's meaningless to blindly build an operating system, at least it's not the most suitable for you.
A complete operating system should include the following seven elements:
Cycle judgment: understand the general trend of the market and judge the current market cycle (such as bull market, bear market, shock market, etc.).
Operational thinking: clarify the basic concepts and strategies of operation, whether to pursue short-term quick entry and exit, or long-term holding.
Coin selection: select potential stocks according to certain standards and methods.
Time selection: determine the best time to buy and sell.
Buy and sell rules: formulate clear buying and selling strategies, including entry and exit conditions.
Fund management: allocate funds reasonably, avoid excessive concentration or dispersion, and ensure the efficiency and safety of fund use.
Risk control: formulate risk management strategies, including stop-loss mechanisms, position control, etc., to control and reduce investment risks.
Through comprehensive consideration and integration of the above elements, you can establish an operating system that suits you, so as to achieve investment goals more effectively.
Let's take a closer look.
1. Cycle judgment
Going with the trend is the first principle of investment. When the market is rising like a tide, the success rate of our various strategies, coin selection and timing ability will be significantly improved. Even if the strategy and timing ability are not perfect, it is possible to make money from the rising band in the environment of the rising market. And if it is judged that the market is rising steadily, the position holding psychology will be more stable, and even dare to buy at a low point, thereby reducing the cost of holding coins and obtaining the maximum profit. On the contrary, if there is no clear judgment on the trend of the market, the position holding psychology will be turbulent, and it is easy to overreact due to small fluctuations, resulting in deformation of operations.
In addition, the judgment of the cycle will provide an important reference for subsequent operations. All buying and selling operations in the bull market must be heavy and concentrated; all buying and selling operations in the bear market must be light and dispersed.
2. Operational thinking
Operational thinking can also be called an operation strategy under different market conditions, but this operational thinking can only be determined on the basis of the judgment of the market, so the accuracy still depends on the judgment of the market. Operational thinking is like a battle plan. How long to fight and how large the battlefield is should be set in advance. You cannot modify the battle plan while fighting, increase troops at will, or change the battle direction at will.
3. Coin selection
Especially in a bull market, the importance of coin selection is more prominent. If you want to get excess returns, you must carefully select the coins you hold, and try to avoid frequent coin changes in a bull market. Frequent coin changes may lead to missed opportunities for gains. It is often the case that the coins you sell rise sharply, while the coins you hold perform mediocrely. The key to bull market profits lies in the combination of heavy investment and holding time.
For large institutions and large funds (managed funds of more than 100 million yuan), the importance of coin selection is even more significant. Global stock long funds rely on stock selection as their unique advantage, which is also an important mark to distinguish different funds. Timing operations usually assume that they can beat the market. Operators who manage millions of dollars of funds may still be able to make profits through timing, but once the scale of funds increases, the effectiveness of timing will drop significantly.
So what characteristics should a coin with excess returns have? We can look at it from the perspective of the banker. If you are a banker, or an institution, or what is called the main force, with a large amount of funds, and want to operate a coin, which coins do you choose?
The circulation plate is small, but not too small. A plate that is too small has poor liquidity, and it is not convenient for funds to enter and exit, and it cannot operate.
There are both large trend themes and no historical problems, such as having been speculated by large bankers before, or having a bad market image, etc.
There is solid on-chain data support or there are conditions to improve performance in the future, so that when the price of the currency reaches a high level, "performance improvement + high transfer (such as airdrops, dividends, on-chain rewards, etc.) + themes" can complete the shipment without a sharp drop in the price of the currency.
4. Timing and trading rules
Timing is the precise confirmation of the timing of entry and exit, which is mainly divided into two levels: mid-line band and short-term speculation. Trading rules are a clear definition of trading discipline. For example, when buying, the buying point requirements of technical indicators must be met, and it should be a short-term buying point, and it needs to rise quickly after buying. Timing is the primary means of controlling risks. Even in a bull market, there may be a large adjustment. The core role of timing is to avoid these adjustments and a big bear market. If the market conditions are not good, it is recommended to wait and see with empty positions.
In a trading system, buying and selling rules should have a certain degree of flexibility and subjectivity, accounting for about 20% to 30%. Completely fixed buying and selling rules will lead to procedural trading and lack of adaptability. Buying rules vary due to different operating thinking and market conditions, and different market conditions will produce different buying points. However, there is a basic principle that cannot be violated: buying must be based on technical buying points.
Selling rules also vary due to different market conditions and operating thinking. Different expected returns will also lead to different stop-profit strategies. Selling does not necessarily have to wait until the technical selling point appears, because by then one or two negative lines have often appeared, resulting in a large loss of profits. Therefore, the selling point requires a certain degree of prediction, and once the stop-profit position or possible high point is reached, it can be considered to sell.
Through such rule setting, traders can respond flexibly to different market conditions, maximize returns and effectively control risks.
5. Fund Management
Fund management is a set of disciplinary management regulations. For example, "in an accounting year, every 10% of the profit is transferred out for protection"; "after the first position is opened, a new position will be opened after there is a profit", etc. Another important point to consider is the "leverage problem". Of course, many bigwigs in the currency circle have achieved wealth freedom through leverage, so whether to add leverage and how much leverage to add varies from person to person, but it should be noted that there is a saying in the investment industry called "profit and loss come from the same source", which means that the place where you make money is often the place where you lose money. There are many people who get rich overnight, and there are also many who have their positions blown up. For novices, it is recommended to use leverage with caution, because leverage will amplify the emotional fluctuations brought about by market fluctuations, resulting in unsatisfactory trading results.
6. Risk Control
Risk control is some iron laws, and everyone has different experiences and regulations. The risk control clauses play the final role in the operation process, ensuring that you will not make mistakes due to "greed" or "lucky mentality". In addition, keeping the risk control clauses in mind can also calm your mood and avoid unnecessary losses due to violent emotional fluctuations.
Trading system example
The trading system provides clear entry and exit signals, making trading behavior more standardized. Only when the system sends a signal, do you buy and sell operations, and wait patiently at other times. For positions that have been held, regardless of profit or loss, you should hold on; for those who are short, you need to wait for the system signal to appear before operating.
The reason why the trading system is called a standardized operating system is mainly to avoid investors' arbitrary transactions. Because human nature has its weaknesses, and mentality is a crucial factor in trading. Although subjective trading can be carried out, even the simplest system can provide certain norms. For example, a moving average strategy: buy when the price is above the line and sell when it is below the line. Even a rule like buying stocks when there is smog in Beijing and selling stocks when the sun is shining is a system. Similarly, there are some simpler so-called "systems", such as buying stocks on single-day and selling stocks on double-day. Although these systems may not necessarily be profitable, at least they provide a complete set of rules to help traders avoid emotional operations. The most complex operating system requires top mathematicians to build several complex mathematical models based on massive data with the help of computers to conduct automated trading. For ordinary traders, the operating system is not the simpler the better, nor the more complex the better, but the more efficient the better. There is no necessary connection between simplicity and complexity and good or bad. For example, among simple moving averages, the most famous is Granville's eight methods of operation. Granville proposed four buying rules: (1) When the moving average gradually flattens from a downward trend to an upward trend, and the stock price breaks through the moving average from below the moving average, it is a buy signal.
(2) Although the stock price falls below the rising average line, it soon turns upward and runs above the average line. At this time, you can buy more.
(3) The stock price falls but does not break the average line and resumes its upward trend. At this time, the average line continues to rise, which is still a buy signal.
(4) When the stock price falls below the average line and moves away from the average line, it is very likely to produce a strong rebound, which is also a buy signal. But remember that after the rebound, it will continue to fall, so don't fight to the end. This is because the general trend has weakened, and a long fight will inevitably lead to being trapped.
Granville's four selling rules:
(5) When the average line trend gradually flattens from rising to falling, and the stock price falls from above the average line and breaks through the average line, it is a sell signal.
(6) When the stock price rebounds and breaks through the average line, but soon falls below the average line, and the average line is still falling at this time, this is also a sell signal.
(7) When the stock price falls below the average line, then rebounds to the average line, but is blocked and falls back before breaking through the average line, this is still a sell signal.
(8) When the stock price rises rapidly and moves away from the rising average line, the investment risk increases sharply and a fall may occur at any time. This is also a sell signal.
In short, Granville's eight methods of operation are to use moving averages to judge price trends, and should generally follow the following rules:
When the moving average rises, it is a buying opportunity, and when it falls, it is a selling opportunity; when the moving average turns from falling to rising, and the stock price breaks through the moving average from below, it is the best time to buy; when the moving average turns from rising to falling, and the stock price falls below the moving average from above, it is an important time to sell.
Granville's eight methods are the simplest trading system that everyone knows, but it seems a bit too universal, and specific adjustments must be made in different markets.
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