Why do some people make money in the short term but always lose money in the long run? In fact, the most fundamental problem is that they do not have a complete trading system.
Without a complete trading system, you don’t know whether the price of the currency is rising or falling, nor do you know how to choose the entry point, let alone when to stop loss and when to take profit. It’s like you are competing with the dealer in a casino. After buying a token, you can only put your hands together and pray that the price of the currency will rise. There is no strategy, it all depends on luck.
When the tokens you bought rise sharply, your greed will take over you again. You will think that it will continue to rise, and then you hold on to your tokens and wait for a further surge. Unexpectedly, it plummets. At this time, you start to panic, and finally sell the tokens in a hurry when they are almost back to the cost price. You have been busy for so long, but in the end you have made nothing. But are you wrong? Actually, no, because this is human nature. When you make money, you always want to make more. When you lose money, you hate losses and fall into fear. You will always be led by your emotions.
Therefore, a mature trader will establish a trading system of his own, which can help you not be affected by your own emotions. All you have to do is follow your strategy, how to allocate positions, when to enter the market, where to stop loss and where to take profit. Your strategy has response plans for various situations. You will no longer panic because each of your operations has corresponding logical support.
Below I will briefly share how to build a complete trading strategy system. Experts please ignore it.
First of all, we must understand that no one can fully predict the market, so trading is essentially a probability game. The purpose of establishing a trading strategy is not to predict, but to increase the winning rate. This is the key to continuous profitability in the long term.
The first step in developing a trading strategy is planning.
Before each transaction, we must make a plan before entering the market. The plan is divided into 5 key points:
First, confirm the trend
Why do we need to confirm the trend? It's simple, because we have a greater chance of winning if we trade along the trend!
We need to make friends with trends, so what are trends? Trends can be divided into three types:
The first is the upward trend. When the price of the currency is on an upward trend, we should buy along the trend;
The second is the sideways trend. When the price of the currency is in a sideways trend, we can wait and see and not enter the market. Why? Because you don't know how long it will be sideways. It may be sideways for a month or a year. If you enter the market during a sideways trend, you will often be trapped. It is possible that you have waited for several weeks for the price of the currency to rise a little bit. So why don't you wait for the price of the currency to turn into an upward trend before you enter the market? This will save more time and get a higher winning rate.
The third is a downward trend. Never buy in a downward trend, and don’t go against the trend, otherwise you will often stop loss and leave the market. It cannot be said that trading against the trend will be 100% wrong, but most people who go against the trend will not end well.
Some people may ask, why did I buy in an upward trend, but the market kept going sideways after I bought it, and some even fell, and I finally stopped loss and exited the market?
In fact, as I said before, trading is a game of probability. We cannot be sure that every time we buy a token, the price will rise. Sometimes when you stop loss and sell, the price suddenly soars, or sometimes when you buy the token, the price tends to stay sideways for a long time, or even fall. We cannot determine the rise and fall of a token, but what we can do is to make sure that we make a positive EV decision every time we trade, so that you will definitely make a profit in the long run.
So what is EV? Let me explain it briefly here. The full name of EV is expected value. In simple terms, it means how much profit will my decision in a transaction bring me on average in a long-term investment process? A positive EV means that your decision can make money in the long-term investment, and a negative EV means that your decision will lose money in the long run.
For example, I have two boxes here, and both boxes have 5 balls. Box A has 3 red balls and 2 white balls, and box B has 3 white balls and 2 red balls. When you draw a red ball, you will get 1,000 yuan, and when you draw a white ball, you will lose 1,000 yuan. If it were you, would you choose box A or box B? I believe everyone would choose box A. Then congratulations on making a positive EV decision, because the number of red balls in box A is more than the white balls, so the probability of drawing a ball is higher.
We extend this example to investment. The price of a currency will not rise or fall without reason. The price of a currency will rise and fall, and there must be a large number of people and funds buying or selling. So when the price of a currency is falling, a large number of people and funds are selling, and the price of a currency will most likely continue to fall. So when you choose to buy in a downward trend, it is like choosing box B and making a negative EV decision. In the long run, you will definitely lose money. When the price of a currency is rising, it also means that a large number of people and funds are buying. At this time, when we buy along the trend, it is like choosing box A and making a positive EV decision. In this way, we will definitely make money in the long run.
Now we all know that we should trade with the trend, but how can we judge the trend?
In fact, there are many indicators that can help us judge trends. For example, we can use moving averages and various forms of trend lines, such as descending wedges, triangles, double bottoms, triple bottoms, pointed bottoms, etc., and there are many more. When we choose one of the indicators to judge the trend, we need to establish more detailed rules for it. The more detailed and clear the rules we need to establish, the better, because a complete trading system must be complete and clear enough.
For example, we now use the breakthrough trend line to buy tokens. First, we judge the trend. Because the coin price has broken through the downward trend line, it is now in an upward trend. Then we wait for the coin price to pull back. So, to what specific position does the coin price need to pull back before we enter the market?
Breaking the trend line
Second, establish entry conditions
So now we come to the second point of the plan, we need to set up the conditions for this trading system.
We use Fibonacci retracements to make judgments. Fibonacci retracements are a technical indicator widely used in the financial field to help traders identify potential support and resistance levels (I will not elaborate on individual technical tools here, you can search on Baidu). The price of the currency must be pulled back to the Fibonacci price of 0.5~0.618, because 0.5~0.618 is the golden price of Fibonacci, so when the price of the currency falls below 0.618, or rises before it falls back to 0.5, we will not trade. This is very clear. We must set the trading system as clearly as possible, so that when you ask others to use your trading system, they can also clearly follow the instructions of the trading system to trade.
Determining entry conditions based on Fibonacci retracements
Third, entry point
Because the true upward trend is to form a higher high, then pull back to form a higher low, and finally break through the previous high to form a higher high, so we set the entry point to when the coin price breaks through the previous high, we enter the market, so that we have double confirmation that this is now an upward trend, and this double confirmation is that the coin price breaks through the downward trend line and the stock price breaks through the previous high.
Enter the market after breaking through the previous high
Fourth, set a stop loss point
Now we are going to set a stop loss point. Why do we need to set a stop loss point? As I just said, investment is a probability game. So when the market goes in the opposite direction of our expectations, we have to admit defeat and leave the market, and wait for the next opportunity to enter the market.
In addition, when the currency price falls, you will not panic because you have set a stop loss point. As long as the currency price reaches the stop loss point, you will immediately stop loss and exit.
We can use the ATR technical indicator, which is called Average True Range. It is a technical analysis tool used to measure market volatility. ATR is calculated by calculating the "True Range" over a certain period of time. The True Range is the maximum difference between the highest price, the lowest price of the current period and the closing price of the previous period.
The stop loss can be set at a multiple of the ATR value below the entry point. For example, if your entry point is 100 and the ATR value is 2, you can set the stop loss at 98 (100 - 1 × 2) or 96 (100 - 2 × 2), depending on your risk tolerance.
Fifth, set a take-profit point
We can set the take-profit point according to the profit-loss ratio. For example, 1.5:1, the take-profit point ratio must be set larger than the stop-loss point ratio. Whether you set it to 1.5 times, 2 times, or 3 times, all of these are fine. As long as the profit-loss ratio is correct, you can make a profit in the long run.
After setting these, a complete plan is born. Let's review it again. First, I will wait for the price to break through the downward trend line, and then we use Fibonacci retracement to determine the entry conditions. Only when the price retreats to the golden area we set will our entry signal be triggered. The entry point is set at the position of breaking through the previous high point. Double confirmation increases our winning rate. If the price goes down, we set a stop loss point, but what if the stock price goes up? We also set a take profit point. You can find that our entire plan, each step is very detailed.
The second step of the trading system is the risk control of funds.
What is capital risk control? As the name suggests, it is your ability to control your capital risk. For example, in each transaction, how much loss can you afford? Why do we need to control capital risk?
First, it can prevent us from losing all our funds. Stop loss is something we can control, so as long as we strictly control our stop loss and take profit, we will be able to make profits in the market in the long run.
For example, Mr. A and Mr. B each have 100 yuan and make the same transaction at the same time. Mr. A sets a stop loss, but Mr. B does not. Now the currency price suddenly plummets. What will be the result?
Because Mr. A did some risk control on his funds, he set the stop loss at 10%, so in the end he only lost 10 yuan. As for Mr. B, because he did not do some risk control on his funds, when the currency price plummeted, he hurriedly stopped the loss and left the market, and finally lost 50%, leaving only 50 yuan.
Next, let's look at this chart. Mr. A only needs to earn 11.11% to get his money back, but Mr. B needs to earn 100% to get his money back. So in summary, in the investment market, your first priority is not to make a profit, but to save money, because when you have no money to make a profit.
Second, good financial risk management can help prevent our emotions from being affected by the market. If we have too much money in a single transaction, our mood will be affected when the currency price fluctuates slightly, and our lives will also be affected.
When our emotions are affected, it is difficult for us to follow the trading system we set. What are the reasons for all these factors? That is, your capital ratio is too large, so you have to reduce the proportion of funds you put in, and do a good job of stop loss and take profit. Some people may ask, what is the most suitable capital ratio? When you invest that money, whether the price of the currency rises or falls, you can make your life completely unaffected, and do one thing well, that is, trade your plan and plan your transaction. Just remember this sentence and believe me, you will definitely make a profit.
The third step of the trading strategy system is discipline.
In fact, once you have completed the first two steps, namely planning and financial risk control, you will naturally become disciplined.
Why should one be disciplined in trading?
First of all, because he has enough confidence, and because he has a complete trading system, he is clear enough about everything he is doing now, and every step is in accordance with the trading system he has developed. He has done what he said, "Trade your plan, plan your trade."
Second, he has no emotions at all during the entire trading process, because he has risk control, and the funds for each order he places are within his affordability, so he will not be affected by market fluctuations, which will not lead to lack of discipline and change of his trading system due to emotional problems.
Third, he is confident enough, why? Because he has tested and backtested this trading system many times, he is completely familiar with this trading system and understands the winning rate of the trading system, so he has enough confidence in his trading system.
Therefore, before actual use, we must test and backtest our trading system to improve reliability. This is what I want to share today about how to build a complete trading strategy system. Establish a scientific trading system and strictly implement it, and you will definitely make a profit in the long run. In the end, I still want to say this: trade your plan and plan your trade.
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