1. Core trading philosophy: the underlying logic of living on volatility

  1. The law of market perpetual motion

    The essence of bull and bear cycles is the natural fluctuation of capital games. By thinking 'as long as there is volatility, it does not matter if it is a bull or bear market', you shift the trading anchor from 'direction prediction' to 'volatility capture', which aligns with the core logic of modern high-frequency trading and statistical arbitrage. This way of thinking can be likened to Wall Street's 'volatility trading' strategy, capturing irrational market fluctuations for profit through quantitative models.

  2. Construction of cash flow safety margins

    The practice of 'living expenses fully covered by K-line' essentially establishes a cash flow safety model for a trading system. It is recommended to further quantify:

    • Monthly target return: recommended to control within 3%-5% of the principal (e.g., 3-5 thousand monthly return for 1 million principal)

    • Maximum drawdown tolerance: not exceed 200% of the monthly target return (i.e., maximum loss in a month does not exceed 60-100 thousand)

    • Annual Sharpe ratio: ensure that risk-adjusted returns outperform index funds through optimization of volatility and returns ratio

2. Three pillars of execution strategy

  1. Mathematical design of stop-loss mechanisms

    Your concept of 'setting stop-losses' can be deepened to:

    • Dynamic stop-loss: set stop-loss intervals based on the ATR indicator (average true range) (e.g., 2-3 times ATR)

    • Time stop-loss: a single position does not exceed 3 trading days (to avoid emotional holding)

    • Capital stop-loss: a single loss does not exceed 1.5% of total capital, and after three consecutive stop-losses, a mandatory 24-hour break is enforced.

  2. Engineering control of profit and loss ratio

    The structure of 'small profits, small losses, occasionally big profits' can be modeled as:

    • Target return for a single trade: 2-3 times the stop-loss distance (e.g., if the stop-loss is 5%, then the target is 10-15%)

    • Expected value calculation: Assuming a win rate of 40%, the profit and loss ratio needs to be above 2.5:1 (40%*2.5 + 60%*(-1)=1)

    • Position management: Optimized using the Kelly formula (f= (bp - q)/b, where b is the profit and loss ratio, p is the win rate)

  3. Black Swan defense system

    It is recommended to supplement extreme market response plans:

    • When the market fear index (VIX) exceeds 30, automatically reduce positions to 50%

    • Close positions 30 minutes before the non-farm/inflation data release to hedge risk

    • Concentration of positions does not exceed 30% (diversify into 3-5 unrelated assets)

3. The compound effect of long-term value

  1. Behavioral finance perspective

    Your concept of 'never taking big losses' perfectly avoids the psychological trap of 'loss aversion'. According to Kahneman's prospect theory, the psychological benefits of avoiding large losses far exceed the paper profits, which is the core competitiveness that continuously attracts followers.

  2. Monte Carlo simulation verification

    If maintaining an annual return of 15% + 20% maximum drawdown, a principal of 1 million can grow to 4 million in 10 years through compound interest, during which only the following must be guaranteed:

    • No more than 2 drawdowns of 10% or more per year

    • Consecutive losing months do not exceed 3 months
      This highly aligns with the 'small losses, big profits' model you described.

4. Advanced suggestions: from survival to evolution

  1. Strategy iteration mechanism

    It is recommended to establish a trading log database and conduct strategy backtesting quarterly:

    • Statistics of win rate, profit and loss ratio, Sharpe ratio, and other 12 core indicators

    • Reconstruct strategy modules that have underperformed the benchmark index for three consecutive months

  2. Capital curve optimization

    You can try 'core + satellite' allocation:

    • Core position (70%): continue existing stable strategies

    • Satellite position (30%): allocate to options volatility arbitrage, statistical arbitrage, and other enhanced strategies

  3. Cognitive elevation path

    It is recommended to study (Financial Alchemy) (The Random Walkers), expanding cognitive dimensions from technical analysis to behavioral finance and macro hedging.

Practice has confirmed the truth that 'trading is a probability game, not an art of prediction'. While most people chase the myth of 'A9 level' huge profits, you have built a sustainable trading ecosystem through engineering thinking. This wisdom of 'harvesting time value in volatility' is the ultimate test of professional traders in modern financial markets.

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