This year marks my 11th year of trading, and I have communicated with thousands of netizens. I found that more than 90% of my friends asked me questions about indicators, trading techniques, and identification of various trading methods, but few people cared about position management.
In fact, position management determines your trading results to a large extent, so today I will talk about these points in detail:
1: Why is position management not taken seriously?
2: How does position management affect trading results?
3: How to manage positions?
Let’s talk about the first point first: Why is position management not taken seriously?
When you start trading, what do you think of first? How to read the trend? How to predict the market? How to see the direction and make money?
So I started to learn various indicators and discuss in various communication groups. All the questions revolved around how much money I made, the direction of prediction, technical indicators, magical trading methods, etc. This is the state of many people when they first start trading, and some people may not be able to get out of this vicious circle for several years.
However, traders at this stage are basically losing money, because it is impossible to predict the market, and indicators are always sometimes effective and sometimes not. Many people sink into the process of constantly changing indicators and lose money. They have learned a lot of trading techniques, but they are still losing money.
In fact, the correct trading cognition should be to pursue the overall profit of trading from the perspective of success rate and profit-loss ratio. The trading cognition rises from the level of pursuing magical indicators to the level of success rate and profit-loss ratio, which is the bottleneck that must be broken through in order to make trading profitable. Only after the breakthrough can trading gradually achieve profitability.
For example, if we make 100 transactions, and the success rate and profit-loss ratio have a profit advantage, we can achieve profit by combining position management. At this point, the importance of fund management becomes apparent.
But the reality is that discussing technical indicators is the mainstream, and everyone is influenced by each other, so everyone thinks that technical indicators are the most important. As a result, few people can break through from the level of trading technology to the level of probability, and position management is not taken seriously.
Next, let’s talk about the second point: Why is position management the most important in trading?
This is because even if the trading system that has been built with great difficulty can be profitable, improper use of positions will lead to margin calls and losses.
To illustrate: a trading system has a success rate of 30% and a profit-loss ratio of 3:1. From the data point of view, it is profitable. However, if the funds are not managed well during the transaction, three problems may be encountered.
A: The position is too heavy and it goes bankrupt in a trading failure.
Let's take the trading system above as an example. From the data, it is profitable, but the success rate is 30%, which means that 70% of the trading opportunities are wrong, and there will be many consecutive stop-loss orders in the trading. If the consecutive stop-loss is 10 times, and a single position stop-loss of 10% of the principal is used, 10x10%, the account will be liquidated.
B: Improper use of positions leads to losses.
Still using the above trading system, 30 successes, 70 stop losses, random positions, sometimes heavy, sometimes light. The probability of heavy positions being assigned to 70 stop losses is higher, which leads to more losses when losing and less profits when making money. In the end, the trading system has good data, but the trading is not profitable.
C: Improper use of positions affects execution.
In the above example, with a 70% error rate and many stop-loss orders, if the position is used too heavily, even if the position will not be blown up, the account loss will be serious if the market does not cooperate. You must know that the loss of the account directly affects the heart of the trader. He is worried that the trading system will fail and he is afraid of continuing to lose money. He loses confidence in the trading system, not to mention the execution ability, and he will definitely lose money.
Even if you have a profitable trading system, you can still suffer losses due to improper position management. This is why.
Finally, let’s talk about: How should position management be done?
Here are two of the most commonly used methods of fund management:
A: Fixed position.
When the account principal is fixed, each position is opened with a fixed number of lots, for example, 1 lot, 3 lots, or 5 lots are used each time. If the account generates profit, the position can be increased according to the proportion of the increase in principal, and the compound interest operation is performed. For example, if the original principal is 100,000 yuan, and 1 lot is opened each time, when the principal reaches 110,000 yuan, 1.1 lots can be opened.
Note: If an account trades multiple products at the same time, the position will change according to the product because the volatility and risk value of different products are different, but the position of a certain product will remain fixed.
B: Fixed stop loss amount.
The stop loss amount for each transaction is fixed, for example, each stop loss is 1%-2% of the principal. For example, for 100,000 yuan, each stop loss is 2% of the principal, which is 2,000 yuan. The same operation can be carried out according to compound interest. When the account generates profits, the position is increased according to the increase in funds. For example, when the principal reaches 110,000 yuan, the stop loss amount of 2% is 2,200 yuan. Different varieties can use the same stop loss amount as the standard for position management.
Finally, let me tell you a truth about trading technology:
In the process of testing, establishing and improving the trading system, I have tried N indicators and methods. Many methods are simple, but they can all achieve profits. The only difference between them is that it is necessary to set reasonable positions and conduct strict position management according to the different performances of the trading system in order to truly implement them and achieve profits.
Therefore, if you already have a trading system, try to improve it from the perspective of position management. After a period of exploration, you may be surprised.