First, heavy positions are fatal; second, no stop-loss is fatal; third, greed is fatal; fourth, blindly entering is fatal; fifth, frequent operations are fatal; sixth, left-side operations are fatal. These experiences can only be understood after enduring multiple painful lessons.
Unfortunately, retail investors do not learn from experience, repeatedly suffering significant losses due to these mistakes. Are you also paying for the same errors? Each loss is a profound lesson, yet why do most traders still find it difficult to avoid repeating the same mistakes?
First, heavy positions are fatal; the cost of greed. Heavy trading is one of the most common mistakes traders make. When you invest a large amount of capital into a single trade, you are essentially substituting rational decision-making with a gambler's mentality. The volatility of the market means that any trade carries risk, and heavy positions only amplify this risk, leading to potential unbearable losses. Heavy trading often results in a broken capital chain, or even total exit from the market. The unpredictability of the market means you can never guarantee that every heavy position will be profitable. It is recommended to diversify investments and strictly control the risk exposure of each trade, keeping the risk of each trade between 1% and 2% to ensure that even in the event of a loss, it will not cause a devastating blow to the overall capital.
Second, having no stop-loss is fatal; it's the grave of wishful thinking. No-stop-loss trading is the second major pitfall for traders; lacking a stop-loss plan means you cannot effectively control risk, ultimately leaving you passively beaten in market fluctuations. No-stop-loss trading makes it impossible to exit in time when losses occur, leading to an ever-expanding loss amount, and possibly total loss of capital. It is recommended to clearly set stop-loss points before each trade and strictly execute them. Stop-loss is not a concession, but a basic respect for market risk.
Third, greed is fatal; the trap of desire. Greed is one of the weaknesses of human nature; traders often attempt to earn unrealistic profits, resulting in neglecting potential market risks. Overly pursuing profits can cause hesitation when in profit, ultimately missing the best exit opportunity and even leading to profit reversal. It is advisable to set reasonable profit targets and exit promptly upon reaching them. Remember, trading is not charity; your goal is stable profits, not getting rich overnight.
Fourth, blindly entering is fatal; the ignorance of adventurers. Blindly entering is a manifestation of lacking a trading plan; having no clear entry logic is merely gambling rather than trading. Blindly entering can lead you to lose direction in the market, ultimately falling into the abyss of losses. It is advisable to formulate a detailed trading plan before entering, including entry points, stop-loss points, take-profit points, and risk-reward ratios; only when the plan is clear can one enter with confidence.
Fifth, frequent operations are doomed to fail due to a lack of patience. Frequent operations are a manifestation of traders' eagerness for success; overtrading not only increases trading frequency but also raises the probability of making mistakes. Frequent operations will exhaust you in the market, ultimately leading to mistakes due to fatigue and emotional fluctuations.
Sixth, left-side operations are doomed to fail due to timing mistakes. Left-side operations refer to forcing entry when the market trend is unclear, which often leads to being trapped in losses. Left-side operations expose you to significant risks during market fluctuations, ultimately resulting in losses due to misjudgment. It is recommended to wait for the market trend to become clear before entering. While right-side operations may miss some profits, they effectively reduce risk.
In the trading market, many people are superstitious about 'frequent trading' and 'daily compounding,' believing it is a shortcut to rapidly grow small funds. However, the truth is: frequent trading not only won't make you rich but will instead lead you to the abyss. Today, we will reveal the fatal traps of frequent trading from multiple perspectives such as mathematical probabilities, cognitive dimensions, and market structure, and tell you the real core of growing small funds—pattern and cognition.
The mathematical trap of frequent trading: why are you destined to lose money?
1. The 'invisible killer' of trading costs
Assuming a single trade cost of 0.5% (including commissions and slippage), if you trade 5 times a day, the annual trading cost will reach as high as 625%! This means that even if your win rate is high, frequent trading will lead to your capital being consumed by costs.
2. The cruel truth about win rates
Even if you have a 60% win rate, what is the expected return from 100 trades? The calculation is as follows:
(60 profitable trades x 1% - 40 losing trades x 1%) - 100 trades x 0.5% = -0.3%. This means that the final result of frequent trading is very likely to be a loss.
3. The warning of the Kelly formula
The Kelly formula tells us that when trading frequency exceeds the optimal betting frequency, the capital curve will exhibit exponential decay. High-frequency trading is like walking a tightrope on a cliff; a slight misstep can lead to a fall into the abyss.
Second, cognitive dimensionality reduction: frequent trading turns you into 'market fodder'
1. The trap of time frames
Research shows that noise accounts for as much as 92% in 5-minute candlestick charts, while the noise in daily charts is only 37%. Frequent traders are often misled by short-term fluctuations and overlook the real trend.
The collapse of decision quality; in psychology, Miller's Law states that the human brain's effective decision-making limit per day is 7±2 times. Frequent trading can lead to a drastic decline in decision quality, ultimately resulting in emotional trading.
3. The enormous waste of opportunity costs
Frequent traders spend 90% of their time capturing 10% of low-quality fluctuations, yet miss out on the real major trends. This behavior of 'picking sesame seeds and dropping watermelons' is destined to fail in achieving capital transformation.
The truth of market structure: why are you always a loser?
1. The cruel reality of liquidity stratification!
Top institutions can access T+0 arbitrage opportunities, while retail investors can only trade on secondary liquidity. High-frequency traders are inevitably at a disadvantage in this unequal game.
, the secret of volatility
Taking the S&P 500 as an example, data from the past decade shows that annualized increases of over 70% are often concentrated in just 7-10 trading days. Frequent traders easily miss these key opportunities.
9. The dilemma of negative-sum games
High-frequency trading is essentially a negative-sum game; the more participants, the closer the expected returns get to zero. Frequent traders are like gamblers continuously betting in a casino, ultimately losing all their chips.
Four, the winning strategy of top traders: pattern and cognition
1. Opportunity filter: only seize top-tier opportunities
Top traders will establish a three-dimensional evaluation system (trend strength, volatility quality, risk premium), selecting only the highest quality opportunities.
2. Focus on critical points
View capital as a probability wave; only release it at critical points of momentum. This 'crocodile-style' waiting philosophy can lead to exponential growth of the capital curve.
3. Cognitive arbitrage: leveraging the market's collective misjudgment
Real excess returns stem from cognitive differences. For example, the negative price event of crude oil futures in April 2020 is a typical case of collective misjudgment by the market. Top traders excel at capturing these macro misalignment opportunities.
Five, the path from small funds to large funds
1. From 'operational addiction' to 'strategic patience'
The essence of trading is the realization of cognition, not the accumulation of operations. When you learn to patiently wait and only seize key opportunities, capital growth will happen naturally.
Build a 'major event impact model' to record and validate the intensity of 10 fundamental turning points' effects on asset prices over three months. This training can elevate your opportunity recognition ability to a new dimension.
3. Pattern determines the outcome; the core of growing small funds is not frequent trading but a profound understanding of the essence of the market. Only by enhancing cognition can one remain undefeated in trading.
Conclusion:
Frequent trading is a path destined for failure, while true success often belongs to those with extraordinary patterns and cognition. As Soros said in 'Financial Alchemy': 'True excess returns stem from cognitive differences, not trading frequency.'
I hope this article can help you escape the trap of frequent trading and find your own trading path. Remember, trading is not gambling, but a contest of cognition. Only by continuously improving oneself can one remain undefeated in the market.