I have been thinking about how to build my personal trading system recently. I believe a complete trading system should include the following content:
1. What to buy? — Variety Selection
2. When to buy? — Trading System
3. How much to buy? — Position Control
4. When to sell? — Profit Taking and Stop Loss Logic
5. What is the trading frequency? — Short-term (intraday), medium-term (weekly, monthly), long-term (quarterly, annually)
1. Variety Selection
Regarding what to buy, I believe it generally follows the following logical thought process.
First, what is the current macroeconomic environment? Without considering overseas factors and only considering domestic economic conditions, if the economy performs well, then stocks and some cyclical commodities (such as steel, copper, etc.) perform well, while bonds perform weakly. If the economy is overall poor, then bonds will perform better.
Secondly, after selecting a certain asset direction, comparisons within the asset class must be made. For example, with stocks, one needs to consider which industry to invest in or which specific stock to buy. This choice can be determined by policy direction, industry prosperity, market attention, and whether it is a leading stock.
2. Buying Timing
Once you have chosen what to buy, you need to decide when to buy. The timing of purchases can be divided into two schools of thought. One is value investing, where the individual has a relatively in-depth study of the company and can accurately assess its price. Buy when the company’s price is below its fair price, and sell when it is above. The second is technical analysis, which involves buying and selling based on technical indicators such as moving averages, MACD, Bollinger Bands, etc. Relevant theories include Elliott Wave Theory, Dow Theory, and Gann Theory. Currently, I am learning and using the modified version of the Chan Theory by Du Yihua and Bai Yi.
3. Position Control
After determining the timing for buying, how much to buy is also very important and is key to profitability. Position control can be based on ATR or judged based on personal experience (which requires a high level of personal trading ability).
4. Selling and Trading Frequency
When to sell, trading frequency, and your reasons for buying. If the purchase is based on value analysis, then the sale is also based on the return to that value, which generally takes a long time, often at an annual level. If trading is based on technical analysis, then the trading frequency may be related to your trading cycle. Generally, stocks are traded on a T+1 basis, so the trading frequency is mostly daily, weekly, or monthly. Futures, due to T0 trading, can have frequencies in minutes, daily, weekly, monthly, etc. If investment is primarily based on technical analysis, determining your trading frequency is crucial.
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