As mentioned before, structural thinking is a high-level way of thinking. The process of establishing a trading system is to use structural thinking to consider the answers to trading problems.
Imagine that you are a follower of various rules in your work and life. Have you ever found that there are unreasonable rules that need to be improved? Or have you ever made rules for your team or organization?
The establishment of rules must be based on a set of reasonable logic, and it is constantly improved through practice. For example, improving the quality of listening to classes helps improve grades. Based on this, the teacher established a rule: sleeping in class is not allowed, and if you sleep, you will be punished by standing. After long-term practice, the teacher found that if the students are too sleepy, they can't listen to the class even if they are punished by standing. So the rule was simply changed to: if the students are sleepy, they can go to the lounge to sleep for half an hour and then come back to listen to the class. The effect is better than standing.
For a trading system, you must first find a tenable logic, and then improve the rules based on this trading axiom or theorem, and then constantly backtest and correct them, and gradually form them. If the underlying logic is untenable, then no matter how many backtests you do, it will be meaningless.
Take my short-term trading system as an example.
The underlying logic of trading (or the logic of profit): Any market price fluctuations reflected in the K-line trend can be classified into two types, running and adjustment. After the price runs for a long time, it will adjust. When the adjustment reaches the end, it will start another run, and the cycle will repeat. This trading system is to capture as many market conditions as possible when the run ends and the reverse adjustment begins.
Based on this logic, let’s further consider the following questions:
1. What is operation? What is adjustment? How to define it?
2. How to determine whether a run has ended?
3. What indicators are needed to assist in making judgments?
4. What is the logic of entry and exit?
This is when the importance of technical analysis comes into play. Based on some basic trading theories, such as the meaning of various K-line patterns, or the market behavior in Wyckoff, etc., we can probably summarize some rules to help you understand what is operation and what is adjustment. It is not enough to understand it. You must clearly define what is operation and what is adjustment.
Then, according to the definition, find the standard for judging the end of the run. But before "looking", one thing must be clear: no matter how hard you look, the result is predictable, that is, you will never find a magic standard to 100% correctly judge the end of each run. (If you find it, it means that more people have found it, and that means that everyone in the world may find it, which is impossible) So if you fall into the misunderstanding of looking for this standard, you will go astray.
In the sentence "find the criteria for judging the end of the operation", the key point is not "find" but "criteria". The most difficult step in establishing a trading system is to establish a rule from scratch. Because many people will focus on establishing a good rule right from the start, but the quality of the rule needs to be tested. The most important thing now is that you have no rules. It is not the same level of difficulty to go from no rules to rules than from bad rules to good rules.
The key points have been mentioned here. As for what indicators to use to assist in judgment and how to establish the entry and exit logic, they are all problems of the same nature. That is, first solve the problem from nothing to something, and then solve the problem from something to excellence.
So how do you judge when the operation has come to an end? I can first establish such a standard: when the 15-minute K-line crosses the Bollinger Band, the 1-minute K-line also crosses the Bollinger Band. Then wait for the 1-minute K-line to turn down and return to the Bollinger Band. When two consecutive K-lines close in the Bollinger Band, it is judged that the operation has ended and the adjustment has begun.
This rule has not been tested, so I don’t know whether it is good or bad, but at least it is a clear and executable rule. Since it is clear and executable, it can definitely be backtested in historical market conditions.
Having said that, I believe everyone has a new understanding of establishing a trading system. In summary, it is to use structural thinking to solve trading problems, to establish a set of rules based on reasonable logic from scratch, and to continuously improve on this basis.
The next article will talk about how to backtest and adjust and optimize based on this set of rules.