99% of retail traders make the same mistake: they cannot hold onto trend-following trades and stubbornly hold onto counter-trend trades.
First, let's talk about the inability to hold onto trend-following trades. Many people have a mentality of 'taking profits and being safe.' If you decide this is your last speculative trade and vow never to enter this market again after taking profits, then I support you. But if not, you are actually hoping to sell at the highest point every time, then the price just happens to start to fall after you sell, and then you buy back at the bottom, repeating this cycle -- in fact, you are gambling on very low-probability events. Often, the situation is that you sell, and the market enters the next round of rise, which has nothing to do with you.
I have seen many new futures traders, who always think of day trading as the highest achievement. They fantasize about becoming wealthy through futures like this: when they want to make money, they go to the futures market for a day, earn a sum, and then are financially secure. Whenever their money runs low, they go back to the futures market to earn another wave. However, while the ideal is beautiful, the reality is harsh; they often miss out on many significant opportunities that could have led to financial freedom.
Incorrect profit-taking causes them to miss out on major market opportunities, while often failing to stop losses when wrong and stubbornly holding onto losing positions, even adding to them. This means they only earn small profits when right but suffer unending losses when wrong. How can they not lose money? The gambler's loss theory suggests that the amount lost in each failure should be equal to the amount earned in wins, but in your case, losses are bottomless while profits are minimal, which is why you ultimately lose everything.
So what is the correct approach?
First, correct your thinking, and then build a scientific trading system.
What is a scientific trading system? Many books on the market are wrong, leading you down a path to darkness. For example, they say you need to have a stop-loss discipline and execute like a machine. This is correct, but what is their stop-loss strategy? It is simply to set a stop-loss after losing a certain number of points.
-- This is a huge mistake! It has harmed many people. Why? You will understand after reading the trading system I present.
The true core of a trading system revolves around the stop-loss point, which is the support point +. If it is a futures short position, the stop-loss point is the resistance level +. If the support or resistance is broken, you must stop loss. (I will provide a link to a public account article below to explain the principles of support and resistance in detail.)
The stop-loss point comes first, then the position size, and the size of the position is set based on the distance from the stop-loss point. For example, if there is a strong stock, buying it is fine, but if its support level is very low, then your position must be light enough.
Position sizing is an extensive topic and is crucial to the trading system, which is often overlooked by most books and so-called teachers. I will write a dedicated article on this later, but for now, I’ll just briefly state: controlling your position is controlling your mindset, and it also serves as a hedging behavior. For example, if you buy a stock, how should you set the position? First, establish a stop-loss point, then enter with a light position. How light should the position be? Light enough that you actually hope it falls, because if it does, it gets closer to the support level, allowing you to add to your position. This puts you in a contradictory mindset where you are happy regardless of whether the price goes up or down. If it rises, even with a light position, at least you made a profit; if it falls, it's just an opportunity to add to your position -- this is a hedging mindset, and I suggest everyone try to develop this mentality. However, the books and master training courses on the market often do the opposite: they set the position first and then set the stop-loss, as their stop-loss discipline is to stop out after losing a fixed number of points. But when you do this, it often leads to selling when you should be adding to your position, and then you helplessly watch the market continue without you.
Once the stop-loss issue is resolved, the next challenge is the take-profit issue.
I can tell everyone that I seldom take profits; I usually just reduce my position and stop watching it. Why do I do this?
Remember this: all your operations are aimed at improving your holding tolerance and reducing costs; holding positions is the ultimate goal.
Because what you want to earn is not a small profit, but a whole big wave, like the double焦牛市 and rebar bull market in 2016, as well as the major bear market in oil-related varieties last year. As long as you can hold on, the profits will be 10 to 20 times. You may not make a profit over a few years of holding, but as long as you can catch one wave, you can basically achieve financial freedom.
-- This is the way I have seen people achieve financial freedom in the speculative market (including myself), which is to hold long-term positions. I have truly never seen anyone achieve financial freedom through day trading. If you would rather believe those fake masters who conduct courses, then I can only say my level is not enough, my exposure is limited, and I suggest you stop reading further.
So why can’t you hold long positions? First, your understanding of profit is incorrect. Most people always focus on the fluctuation of the total assets in their account. When it is floating profit, they say they are making money. This mindset is very difficult to hold onto.
My method is to avoid looking at the total asset value and redefine profit. How to define it?
1. If I correctly identified a stock that rose for a while and then reduced my position, I should then calculate how much total capital I would have if this stock breaks the support below, leading to a stop-loss. The value from this calculation, minus my total capital before trading this stock, is my profit.
As shown in the diagram, if my total assets before trading this stock were 10,000 yuan, the stock rose for a while, and then I sold half at a high level. Now, let’s assume (this is hypothetical!) that the stock breaks below support. Calculate how much your total assets would be in this situation, since you sold half your position and have half that is profitable. Even if it breaks below support, your total assets would still be 11,000 yuan, meaning that your profit from this stock is still 1,000 yuan. So this 1,000 yuan is considered your profit. At this point, you should not care how much it rises after reducing your position, just convince yourself that your current total assets are only 11,000 yuan, don't look at the floating assets in your account, and don't worry about this stock; use the same method for the next stock.
Or another method is to raise the stop-loss. For example, if you bought a stock, it rose for a while, then consolidated at a high level, and then surged with volume, you can raise the stop-loss to the new platform level. After raising the stop-loss, calculate how much your assets would be if it breaks the new stop-loss level, and subtract this value from the capital you had before buying this stock; this difference is considered your profit, as shown in the following image:
Assuming after breaking the new stop-loss point you still have 11,000 yuan left, then subtract the 10,000 yuan you had before trading this stock. This 1,000 yuan difference is your profit, allowing you to take out 1,000 yuan to enjoy life. No matter how much this stock rises afterward, just ignore it; convince yourself that your total assets are fixed at 11,000 yuan, and use the same method for the next stock.
Keep this up, and with profits, you will achieve long-term holding; one day you will catch a big trend.
Now, two remaining questions: how should you judge support or resistance? What counts as an effective breakout? To solve these two questions, you need to understand the essence of support and resistance.
First, let me ask everyone a question: why do newly issued stocks experience a surge? And after a rise, why do they fall below the issue price and continue to decline? They almost never start consolidating immediately after issuance. Even if they do consolidate at the issue price, it is usually after a significant rise or fall.
Because new stocks naturally satisfy the volume increase with respect to time and price.
What does that mean?
Those participating in IPOs are all buying at the same price level and at the same time, meaning that all trading volume is concentrated at the same time and price level (let's assume this stock's issue price is 10 yuan).
What effect will this have?
Think about it: you buy stocks to wait for them to rise before selling out to make a profit, right?
Currently, everyone participating in IPOs shares the same mindset: it's rare to hit the jackpot! I'm definitely going to make money before leaving! Everyone is waiting to sell after the price rises.
And precisely because they all bought at the unified price level of 10 yuan, this means that there is almost no sell order at the 10 yuan level.
Most of the potential sell orders are above 10 yuan. Therefore, at the position of the issuance price of 10 yuan, the stock price can only rise and cannot fall.
Next, let's generalize this principle to the entire market. Besides new stocks, what other types of stocks exhibit the same characteristics as new stocks?
That is a stock that has been consolidating with volume for a while.
Imagine a stock that has been consolidating for a while, accumulating a large volume at the same price, which means that most holders' cost price is at this level. Let's assume this price level is 10 yuan.
The same principle applies: the reason these people buy at the 10 yuan level is that they believe this stock will rise above 10 yuan. As for how much it will rise, each person has their own answer, but they all share a common belief that this stock will not fall below 10 yuan.
So, at 10 yuan, everyone chooses to hold out for a rise.
Thus, we can say that 10 yuan is a support level.
If in the future the stock price rises with low volume and then falls back, the closer it gets to 10 yuan, the fewer sell orders there will be, because most holders' cost is at 10 yuan.
Thus, from a god's-eye perspective, the distribution of potential sell orders is mostly distant from 10 yuan, while the closer it gets to 10 yuan, the fewer potential sell orders there are, as shown in the following diagram:
In this diagram, the small red circles represent potential sell orders.
We can see that potential sell orders become denser as they move upward, but become sparse as they approach the lower 10 yuan level. In other words, the closer it gets to 10 yuan, the fewer people are willing to sell.
We can refer to the sparse area above 10 yuan as the potential sell order 'vacuum zone' (though it's not an absolute vacuum).
Due to the existence of vacuum areas, only a small amount of capital is needed to push the stock price up.
And as time passes, with the accumulation of trading volume, this vacuum area will constantly expand upward, meaning that the area of potential sell orders will keep moving up. Why is that?
This introduces the famous 'toilet pit theory+' in capital markets.
The so-called 'toilet pit theorem' in capital markets concludes that as the stock price accumulates trades within the original price range for a longer time, the proportion of long-term holders will inevitably increase, while short-term traders will be squeezed out, leading to a necessary rise in stock prices (of course, this assumes there are no negative factors affecting the stock).
Why is that?
Just imagine there is a limited number of toilet pits, let's assume there are only 10, and now there are only two types of people coming to use them: 1. Those who leave after using the toilet; 2. Those who occupy the toilet but never use it, always lingering.
As time goes on, all these toilet pits will inevitably be filled by the second type of person, those who occupy the toilet but never use it. Because the first type of person leaves after using it, they do not occupy the toilet. However, when the second type of person arrives, one less toilet becomes available.
Therefore, as long as there is an increase in the number of people occupying the toilet, even if only 1 out of 100 people is this type, it is just a matter of time before all the toilets are completely occupied by this type.
When all these toilet pits are occupied by this type of person, there will be no more available toilets.
Now, let's replace the first type of person who leaves after using the toilet with short-term speculators in the stock market, while the second type of person who occupies the toilet without using it represents long-term speculators.
What is the characteristic of long-term speculators? They only sell at relatively high price levels and steadfastly hold before that.
As mentioned above, over time, as long as the stock price continues to oscillate within the original price range, long-term speculators will inevitably occupy most of the circulating shares, while short-term speculators will be squeezed out. When most of the circulating shares of a stock are held by long-term speculators, what does that mean? It means that potential sell orders will become fewer and fewer, equivalent to the majority of the stock capital being 'frozen', and with fewer sell orders, the buying pressure has no limits. What does this imply doesn't need much explanation; thus, a significant upward price surge is just a matter of time.
This is also why stock prices cannot remain at one price indefinitely; they must fluctuate.
Therefore, those who are bullish are always squeezed out by those who are even more bullish, leading to stock prices breaking out of their original range after oscillating for a while, and then entering even larger ranges over a longer period. Thus, stock prices tend to be in an upward trend, but there will always be fluctuations along the way.
Of course, the above holds true only if this stock itself has no operational issues or negative factors, and the market is in a state of long-term inflation.
This is why, if a stock accumulates many trades in a sideways movement, the proportion of long-term bullish holders increases. Consequently, the vacuum area above the current price becomes larger, meaning the funds required to push the stock price up become smaller. Or, with the same amount of funds, it can push the stock price very high (it doesn't necessarily need to be driven by a major player; it could just be a few more retail investors).
After rising, the dense trading area in consolidation becomes an important support level, assuming it is currently at 10 yuan.
But if you think the stock price can never fall below 10 yuan, then you are gravely mistaken!
Next, an important question: why does the trend turn bearish if it breaks the support level of 10 yuan, causing the stock price to fall inertia-like, and 10 yuan becomes a resistance level?
For example, we can observe that after a new stock is issued, it often rises on the first day and then falls. If it breaks below the issue price, it continues to fall without looking back. Why does the stock price enter a bearish trend after breaking support?
Understanding this point is crucial; it is the core of retail trading and the first step towards achieving financial freedom through trading.
The core of retail trading lies in the setting of stop-loss points, where the stop-loss for going long is the support level. If it breaks below support, you must stop-loss decisively. The position size should be set based on the proximity to the stop-loss point (support). If the stock price is far from the stop-loss point, the position should be light, allowing for an increase when the price returns near the stop-loss, while if it breaks the stop-loss point, it should be decisively cleared.
Using this method, even if the win rate is only 50% or even lower, as long as each loss is small, while profits have no upper limit.
To achieve this, first learn how to identify support points, as well as the true and false breakthroughs of support or resistance levels.
To be able to identify this, you must first understand why a trend turns bearish after breaking support, and why it turns bullish after breaking resistance.
If you want to truly understand support, resistance, and breakouts, I recommend the following article:
You can only profit in the stock market if you understand this article thoroughly -- an article that explains the underlying logic of stock technical analysis.
Still, the same old story: if you don't know what to do in a bull market, click on the avatar of Kuige, follow for bull market spot planning, contract passwords, and free sharing.
