I. The biggest feature of an excellent trading system: quantification.
1. An excellent trading system must have one thing: quantitative standards.
'A wave of big market movement is about to happen' is not enough; it must include how long and how much movement;
'If it drops a bit more, it can be bought' is not enough; it must include how many points to buy;
'Entering the market when others are fearful' is even less sufficient; it must include when, at what time, and at what points to enter... and so on.
Quantitative standards must be clear execution instructions, and cannot be vague.
2. For example, the three iron rules of the cryptocurrency market that I often mentioned on Weibo: strict stop-loss system, do not heavily invest in one coin, do not use leverage.
The first two of these do not count as quantitative standards. 'Strict stop-loss' must include how many points must trigger the stop-loss, and if it is more specific, it must be clearly written out so it can be easily executed; 'do not heavily invest in one coin' must include how much is considered heavy, 50% or 70%. If you want to establish a trading system, these things must be quantified.
3. Once a trading standard cannot be quantified, it easily leans towards emotional trading.
Why are many trading standards difficult to execute? Because they are not quantified. The two main purposes of a trading system are: to pursue a long-term overall high expected value and to cage emotions within a system. Therefore, unquantified standards are not good standards, even if they seem good. With a 'quantitative' mindset, when facing various trading strategies, you will have a scale in your heart.
4. Why is it easy to panic in trading? Panic stems from uncertainty about the future.
If there are quantitative standards, it will be clear before trading: how to operate when the market rises, consolidates, or falls?
By monitoring the trading system every day, I can see the strategies for the next day in these three directions. Thus, where does panic come from? Just follow the steps. Trading is like the mechanized labor of assembly line workers, not an exciting and thrilling adventure game.
5. The process of selecting trading strategies to enter the trading system can filter out many strategies that seem impressive but have no practical value through 'quantitative thinking'.
To ensure that the selected strategies can all trigger clear trading instructions, only then can the 'system' play its role in suppressing the influence of emotions on trading. Just like Simmons's Grand Medal Fund, once the system is established, the vast majority of transactions are completed by machines.
6. The next article will discuss the selection criteria for trading strategies.
What I want to do is not only share my trading system with you but also to explain step by step how to establish a trading system. This way, everyone can get hands-on experience and become self-sufficient without necessarily having to copy my trading system. Who knows, one day a financial genius might suddenly emerge here, capable of achieving something great in the future. Then I would have fulfilled my role as a guide, which is a great virtue.
II. Standards for selecting trading strategies: profit expectation, success rate, triggering frequency.
1. Selecting trading strategies to enter the trading system.
This step is the most difficult. As mentioned before, there are thousands of strategies in the world, which ones should be chosen? Which ones should not? After filtering through 'quantitative thinking', the remaining indicators and strategies with quantitative standards are still numerous. To backtrack so many indicators and strategies to the market conditions of the past few decades to finally determine the quality of the indicators and whether they can be included in the system is an astonishing workload.
2. There is no shortcut to the vast amount of backtracking and statistical work.
Is there a shortcut to such a vast amount of backtracking and statistical work? Unfortunately, no! At most, some indicators and strategies can be run through software, but more still needs to be manually compiled. In my past 21 years of professional investment career, a large amount of time was spent on this. The world is very fair; there is no success without effort. If you are not willing to spend time on research, then you will continue to pay tuition in the market.
3. The impossible triangle in investment.
In economics, there is the 'impossible triangle': monetary sovereignty, exchange rate stability, and capital mobility; in investments, there is the 'impossible triangle': high returns, low risk, and high liquidity. In the field of trading systems, I have also created an 'indicator impossible triangle': high profit expectations, high success rates, and high triggering frequencies. In other words, there are no indicators or strategies in the market that simultaneously satisfy these three conditions. People have three highs, but indicators do not.
4. The first standard for selecting trading strategies is: profit expectation.
As mentioned earlier, the first purpose of establishing a trading system is simply to make money steadily and make big money. However, if an indicator triggers and only earns a small profit every time it succeeds, even if it does not lose much every time it fails, it cannot be considered an excellent indicator and strategy, at least not as the main and most important indicator and strategy in the system.
5. In other words, I believe that the most important indicators and strategies in a trading system should be those strategies that can earn a lot of money once successful.
Of course, if you can find those indicators and strategies that earn very little profit each time but have a very high success rate and are triggered very frequently, that would also be impressive. Unfortunately, over the years, I have not found such indicators; the success rate and triggering frequency are difficult to be compatible. However, someone has found it, which is the gecko investment mentioned in the last chapter by Simmons.
6. Therefore, there are always some geniuses that make people envious and gritting their teeth. In envy, we must also admit that we are just ordinary people.
Since for 99.99% of people, the success rate and triggering frequency cannot be compatible, there is only one way left: let 'profit expectations' dominate, and find ways to compensate for the remaining genetic defects through other strategies. At this point, everyone should understand that those who claim to dominate the trading market with just one trick are 99.99% talking nonsense.
7. The next article will discuss the coordination of multiple trading strategies.
If you have questions, you can leave a message in the main post on Twitter. I will reply when I see it in my spare time, and please try not to send me private messages. This way, we can have an open discussion on a question, which can also bring new inspiration to other friends. Twitter is still being explored, especially this comment reply section, which is entirely different from Weibo. Therefore, if some comments are not replied to, I hope everyone can understand!
III. The principle of coordination between multiple trading strategies: complementarity.
1. If an indicator or strategy has a good profit expectation and success rate, but the triggering frequency is too low, it will waste too much waiting time, and the average return will not be satisfactory. In the face of indicators or strategies that accommodate both 'profit expectations' and 'success rates', they are rare and can only be used as backup strategies, not daily tools. If encountered, use them; if not, it does not affect daily trading.
So
2. The most important indicators or strategies must simultaneously satisfy 'profit expectations' and 'triggering frequency'.
Many people could not understand this point before. As I peel back the layers, everyone should understand the reasoning here. According to the 'impossible triangle' theory mentioned in the previous chapter, indicators and strategies that can satisfy both points will have a low 'success rate'. Therefore, it is essential to have other indicators or strategies to complement the shortcomings.
3. The principle of coordination between strategies is: complementarity.
Since the main strategy has flaws in 'success rate', it is necessary to find indicators that have a 'high success rate' to complement the shortcomings of the main strategy. It should be noted that using 'complement' to describe may not be very accurate; I prefer to use the term 'relay' to accurately position the secondary indicators. Everyone may not understand this now, but when I use my trading system as an example in later chapters, it will become very clear.
4. Trading is a science and also an art.
For a trading system, its artistry lies in how to effectively and efficiently integrate various strategies into the K-line trend. If your trading system consists of one main strategy and multiple secondary strategies, how can you effectively and efficiently integrate them? The answer is: position weight. Once the position weight script is written, the final execution of buy and sell operations can be automated, allowing us to act like a robot.
5. In summary, we need to find the main indicator strategy that can simultaneously satisfy 'high profit expectations' and 'high triggering frequency', then find other 'high success rate' secondary indicator strategies to relay, and arrange the position weights of each indicator strategy, and continuously fine-tune and optimize this over the long term. Does it seem that establishing a trading system is not that difficult? It's like a password lock, where difficulty lies in an instant.
6. Starting from the next article, I will enter the chapter sharing my own trading system.
I want to remind you again that I do not believe my system is the optimal one; I am just providing everyone with a basic reference so that many friends can see what a trading system truly looks like for the first time in their trading careers. Since everyone's fundamentals are different, theoretically, different types of investors should establish different trading systems, with the same principles but different appearances.
IV. Overview of My Cryptocurrency Trading System.
1. An individual's trading may be chaotic and irregular, but the trading of a large group of people will form order and establish patterns at certain special moments. Indicators and strategies exist to explore and clarify these orders and patterns.
From the user's perspective, it is unnecessary to figure out the deep logical reasoning behind this, and it is only necessary to understand whether the indicators and strategies have a real probability advantage at certain special moments.
2. Different trading markets have varying overall participant differences, which can lead to indicators and strategies experiencing difficulties when transplanted between different markets; thus, adjustments and optimizations are needed. For example, Thomas Demark's TD sequence is most suitable for the US stock market at 13, while the optimal number for the A-share market is 9; for example, Bill Williams' consistency profit method requires parameter adjustments on MACD when transplanted to the A-share market to maximize its effectiveness.
3. All the indicators and strategies in my cryptocurrency trading system are transplanted from the A-share market.
There are some that are relatively applicable, or say that although not very applicable, but are easy to backtrack and adjust, so they can be optimized without spending too much time; on the other hand, there are some that are not very applicable or I'm still unsure about their applicability, and adjusting them can be quite troublesome, requiring a lot of time and energy for trading backtracking and parameter adjustments.
4. For example, the cycle influenced by the structure formed; in the A-share market, the optimal is 24 cycles, but what about the cryptocurrency market? The A-share market has 4-hour trading, while the cryptocurrency market trades continuously for 24 hours. Is the structure still influenced by 24 cycles? If not, how to optimize? For example, in sequences, the A-share is 9, but when transplanted to the cryptocurrency market, the success rate is much worse than in A-shares. How to adjust? These all require trading backtracking to obtain statistically advantageous values.
5. Old followers know that my main battlefield is stocks and futures; trading cryptocurrencies is just entertainment, so I lack the energy and motivation to do too complex indicator backtracking statistics and optimizations. Writing this tutorial serves two purposes: first, to make a periodic summary and provide friends with some reference; second, to inform those who are interested in cryptocurrency trading and willing to explore this direction in depth about this specific direction, as someone might be able to optimize some indicator strategies by themselves, which would be great.
6. My trading system is composed of three parts.
1. Trend and structure;
2. Cycles and sequences;
3. Other indicators.
There are only trends and structures, with position weights. All operational actions will be determined by them, with trends as the primary focus and structures as the secondary. Cycles and sequences are fine-tuned aids to trends and structures and cannot be used alone. Other indicators either further assist the main indicators or serve as backups for extreme market conditions.
7. Strictly speaking, a trading system should be divided into three versions. Version 1.0 operates based on only one indicator. For example, the second article on Twitter made over 6 times profit through trading backtracking. Such cases where a single strategy can yield significant profits are almost impossible in the stock market. The reason it can be achieved in the cryptocurrency market is that the volatility period is shorter than in the stock market, and the one-sided movements are larger. Old followers should have gotten used to this; this is why I switched to trading cryptocurrencies.
8. Version 2.0 is a trading system that adds multiple indicators as assistance based on the 1.0 main strategy. This is the trading system I am currently sharing. Version 3.0 is built on version 2.0, incorporating my personal market trend experience corrections, with the most important adjustments reflected in position management, replanning positions while respecting system indicators. Just like Simmons's quantitative trading, there will occasionally be manual interventions.
9. For example, after a round of bull market, even if it re-establishes the trend after some time, the standard for version 2.0 is to go all-in, while version 3.0 may only enter a base position, and if the market stabilizes, then find a buying point to add. Because after the adjustment stops falling and stands on the trend, based on experience, it is either a small rebound or a continuation of the downward trend, the probability of continuing to make new highs is low, so even if it stands on the trend, it can only be a small position entry. Such examples are not uncommon.
10. Unfortunately, version 3.0 is highly related to personal ability and trading experience, requiring high professional qualities for mindset control and trading proficiency, and is not replicable. This is also why many people on Weibo say they can't learn it even after watching for years. So here, I will share version 2.0, which most people can learn. The good news is that the final results achieved by version 3.0 will not be much higher than those of version 2.0. For dealing with the cryptocurrency market, version 2.0 is sufficient.
11. Ordinary people must practice the sword manual to become experts; otherwise, stepping onto the battlefield is a dead end. After experts are forged through rigorous training, the sword's direction is the manual, and they can act freely without exceeding the bounds. Alright! The tutorial is finally about to get to the main topic; in the next chapter, I will discuss the trend of my cryptocurrency trading system. This is the soul of my entire trading system. At the request of several fans, I will attach images to help everyone have a more intuitive understanding.
From novice to expert: a step-by-step guide to building your cryptocurrency trading system (V).
My cryptocurrency trading system: trends.
1. Trends are divided into trend lines and trend channels.
The trend line is drawn using the built-in drawing tool of market software, by manually connecting the lines between various highs and lows, requiring a certain level of foundational knowledge and experience, which may not be very friendly to beginners. Over the years, I have considered this to be very simple, yet many friends find it difficult to understand. As shown in the figure below, this is the trend line I often post on Weibo.
2. In recent years, I have drawn too many trend lines on WeChat and Weibo, and have done several explanations sporadically. Due to space limitations, I will not elaborate in detail here. If needed, you can buy a book to learn it yourself, as this is fundamental knowledge that you can definitely learn if you are willing to spend a little time. The same goes for later; I will not elaborate on the most basic, easily discernible, and accessible knowledge, only highlighting the key points and essence.
3. The trend channel is based on various moving averages as the underlying logic, embedded in trading software with adjusted and optimized parameters, automatically generated by the software, intuitively reflecting the current market phase. Regardless of how it is referred to in the market, to be precise, I prefer to call it a long-short channel. This indicator is relatively friendly to beginners, as it can be quantified to specific points and does not require the ability to draw lines like trend lines.
4. Why do I never post trend channels on Weibo? The reason is simple: this thing is not mine; I modified it based on someone else's source code, embedded it into cryptocurrency market software, and adjusted the parameters for use. Therefore, there is no need to ask me for this source code; you have to find a way yourself. To respect originality, at least I will not actively spread it. Of course, this is not difficult; if you put in the effort, you will find it.
5. Although trend lines and trend channels have differences in logic and details, many years ago I conducted trading backtracking statistics for both, and ultimately their performance on many underlying assets was similar, almost comparable. For instance, during the Spring Festival, Bitcoin showed a buy signal on the trend line, which was subsequently confirmed by the trend channel. And every time the trend line breaks, the trend channel also triggers a sell signal around the same time.
6. Ultimately, in terms of overall profit and loss, the usage effect of both will be similar. So when it comes to the choice of trading systems, both can be used. Those with drawing skills can use trend lines without relying on other software tools; those with certain programming skills can use trend channels for a one-time, worry-free, and labor-saving experience. Personally, I still prefer trend lines, even though the final profits may be indistinguishable, the sense of achievement is greater.
7. The trading backtracking table that made over 6 times profit was derived from mindlessly buying and selling based on the trend channel. The strategy is so simple it’s outrageous: buy in all positions when standing on the channel; sell in all positions when breaking the channel. Isn't it crude to the extreme?!
The biggest advantage of the trend is: never miss a major opportunity, never get stuck.
I previously said that as long as a bull market comes, it will definitely be captured, and some people criticized me for boasting. As long as this simplest point is achieved, boasting becomes reality.
8. You should know that once you stand on the trend channel, it does not mean every time there will be a major bull market, and even the success rate is very low. However, every major bull market starts after standing on the trend channel, without exception. Similarly, once the trend channel is broken, it does not mean every time a downward trend will start, and the success rate is also very low. However, every major bear market starts after breaking the trend channel. The trend channel strategy can protect us from making principled errors.
9. What is a principled error? It is missing the main upward wave and stubbornly holding onto the main downward wave.
'Trend channels' solve the two biggest problems at once. Whether the market is surging or plummeting, the main upward wave will not escape you, and the main downward wave will not trap you. These characteristics are also clearly visible on the trading backtracking table: the most profitable trade surged more than 5 times, while the most significant loss was only 13 points.
10. Although this single indicator can achieve decent results in the cryptocurrency market, it is far from enough. Because it is too crude and not delicate enough, it has inherent flaws: the success rate is too low. It wears out significantly during the consolidation phase, but in order to wait for that one big bull market, one has to endure the wear and tear. The data from the trading backtracking table on 'success rate' is discouraging: only 10%. Nevertheless, I still believe it is the best strategy for cryptocurrency investment, without exception.
11. Four years ago, when I first entered the field, I published an article stating that trend investing is the best strategy for the cryptocurrency market, and I am even more convinced of this viewpoint now. Therefore, the trend indicator rightly becomes the only main indicator in my trading system, and its position is even more secure. At the same time, since the trend is too crude, foolishly going all-in and cutting losses, succeeding only once in ten attempts is obviously not satisfactory. Are there other indicators that can compensate to some extent and make the trend more delicate?
12. The answer is: yes. From hundreds of indicators and strategies, I chose 'structure'. In the next chapter, I will discuss the structure of my cryptocurrency trading system. 'Structure' is the only secondary indicator in my trading system and also carries a significant position weight. If the trading system can only select 2 indicators, they would be trend and structure.
