Trading experts only focus on one focus
The trading market is vast, filled with a myriad of complex information. Many people get carried away by the dazzling information, wanting to seize every opportunity they see, feeling that there is always money to be made in the market, and missing out would be a sin.
In reality, the trading market is much like our real life, with various information and temptations. However, the biggest difference between people lies in their ability to process complex information, to integrate and comprehend it, and whether they can focus on a certain type of information to become proficient and strong in it.
Therefore, we must focus on a specific point, grasp the core of the issue, in order to take that point to the extreme and make money.
I have spoken with many friends who have achieved stable profits in trading. Although they excel in different areas, they all share a common characteristic: they are very focused and do not punch left and right. Today, I will discuss our common trading insights on how to focus on a single point and maximize our profitability.
1. Trading experts focus only on one big goal: making money. All other details are minor episodes on the road to profit and do not require excessive attention.
A friend asked me: I feel that a 200-point stop loss is too large, but reducing it by 50 points often leads to being stopped out. I am constantly optimizing, but I am never satisfied. When I encounter a series of losses, I start to doubt myself, feeling like I've walked into a dead end. What is the right choice?
I said: Actually, you have missed the point. The number of points for the stop loss is not important. What matters is that the stop loss you set leads to a profitable long-term result that can be executed consistently. That should be your standard. You are currently focusing on the short-term results brought by the stop loss settings, and you are being led astray by these results. Not only does this make you feel bad, but it also distracts you from your big goal. How can you achieve profitability then?
True trading experts have clear goals and only pay attention to the overall performance of the trading logic. All other details of the strategy serve the ultimate result of making a profit.
Many people often fall into the technical trap of "treating the symptom rather than the cause." For example, a trading system has different elements, and each element has different methods. For instance, there are breakouts and pullbacks for entry, and various options for stop loss and take profit. Some people just solve the entry problem, only to find that the stop loss and take profit are problematic. Once they solve the stop loss and take profit issues, the money management becomes problematic.Problems keep emerging like a set of nesting dolls, making one feel flustered, anxious, and uncomfortable. In reality, a trading system is a whole entity, and it is essential to address issues in a coordinated manner. Do not easily change technical standards due to a specific market situation. For instance, if you encounter a fake breakout, do not simply widen your stop loss. While this may help you avoid previous fake breakouts, it disrupts the original trading system's success rate and risk-reward ratio, throwing the entire system out of balance.
Your focus should be on whether the trading system can yield long-term profits. If you shift your attention to solving fake breakouts just because of a few instances along the way, then your focus is misguided, and the system becomes ineffective.
Moreover, there will always be trade-offs on the road to making money; there is no absolutely perfect trading strategy. Many people prefer trend trading, and there is a prevalent idea that if you can catch a significant trend, you can make a substantial profit. However, few mention that the success rate of trend trading is inherently low. Before you can make a significant profit, you may have to go through a long period of stop losses, with many people failing just before the dawn, allowing only a small number of trend traders to profit.
Although the profits from range trading may not be as impressive as those from trend trading, the success rate is more balanced, making it easier to stick with. So as long as the trading strategy ultimately helps us make money, even if it has some flaws and there are many unsatisfactory aspects in trading, our purpose is to make money, and nothing else matters.
This is similar to working for a boss, where you might constantly dwell on being unhappy with the job, a bad boss, unpleasant colleagues, or unsatisfactory work, with negative emotions surrounding you. But we need to be clear that we work to make money, not to make friends or to be happy with the job. As long as the money is right, nothing else matters.
Do not fall in love with the market trends, nor with your job. Once you understand this, with no emotional attachments, your actions will naturally be swift and decisive.2. Trading experts focus only on one type of market trend.
Let me share a mistake I made in the past.
After establishing my own trading system and setting the logic for swing trading, I would enter after the first wave (1st wave) had completed and was in a correction phase, get on board during the second wave, and then trade the third wave, aiming for a fixed profit-to-loss ratio. After taking profit, I would wait for the market to form a new first wave and continue to trade the third wave.
After implementing this strategy for a while, the performance was decent, with profits gradually accumulating. However, I noticed a problem: many times after taking profit on the third wave, the market continued in a significant trend, but I was out of position.
After missing out a few times, I got restless and changed the rule to only close half of my position at the profit-taking point, keeping the other half to wait for the subsequent major trend.
The result was that I was too naive and oversimplified the market conditions.
Markets do not always follow trends; instead, they are mostly characterized by consolidation phases. Many orders that could have taken profit only did so for half, and then the market reversed. Additionally, because I held a position, I lacked the confidence to trade the opposite third wave, missing out on potential profits.
The chart shows the candlestick graph of the Euro to US Dollar exchange rate.
The first wave on the left is established, the second wave corrects and I enter the market, then after the market rallies, I close half of my position, holding a long position. Subsequently, the market forms a downward 123 wave structure.
Because I held a long position, I had a bullish expectation for the market, and thus, I was hesitant to take the short position, missing out on the profit from the short trade.After the establishment of the first wave on the right, the second wave retraced and entered the market. The market quickly surged, and half of the position was closed, but then the market reversed, and the remaining half of the long position's profit was wiped out.
The advantage of swing trading is the ability to close positions quickly, lock in profits, and flexibly grasp the direction, achieving profits in a more volatile market.
However, in order to hold on to the profits of the trend market, I changed my trading strategy, and as a result, I directly lost the advantage of swing trading, which was not worth the loss.
In the end, the trading became a mess, the advantage of profit was gone, and losses began. It was at this point that I realized that if you do not focus on a type of market and try to do everything, you will not do anything well.
In fact, the mistake I made is also being repeated by many people now. They want to do both trends and swings, or want to find an "all-in-one trading system" that captures both trends and swings, or even say to set up two trading systems, one for trends and one for swings, to take advantage of all market conditions.
But here lies a paradox: how can you accurately predict when the market will trend and when it will swing?
So sometimes, greed is the original sin of loss.
Let me share a simple and practical method for a certain market condition.
For a particular asset, when the trend is clear, use the double moving average to trade in the direction of the trend on a smaller scale. Let me give an example.
The Shanghai Stock Index plummeted in January and February of this year, especially in early February when it fell to the lowest point of 2635, which is a low point in several years. There was a strong expectation to bottom-fish at this level, and the probability of the market going up in the future was very high.In the foreign exchange market, the FTSE A50 Index tends to move closely with the Shanghai Composite Index. After the Shanghai Composite Index reaches a bottom, the probability of a bullish trend for the FTSE A50 Index is also high.
At this stage, using the crossover of double moving averages at the 1-hour level for swing trading has a high success rate, as shown in the schematic diagram.
The diagram shows the candlestick chart of the FTSE A50 Index, with the daily candlestick on the left and the hourly chart on the right.
In early February, after the FTSE A50 Index tested the bottom for the second time, it began a complete bullish trend. During this period, using the golden cross of double moving averages at the hourly level for long positions has been highly successful, with a significant profit-to-loss ratio.
You can pay attention to the direction of some varieties in the long cycle, only trading in the market with a clear long cycle direction, and entering the market in the short cycle, which can achieve a higher success rate and profit-to-loss ratio.
3. Trading experts focus only on certain varieties.
There are many varieties in the trading market, but each variety, or each category of varieties, has its own characteristics. It takes a certain amount of time to deeply understand the operating rules and temperament between varieties.
Many friends, when they first enter the market, see a dazzling array of varieties and can't control their hands, wanting to trade all the varieties. Once there is no movement in the variety they are trading, they can't help but look at other varieties to see if there are opportunities. When they see that other varieties are doing particularly well, they can't help but enter the market directly.
As a result, the original trading rules are broken, and the funds for the original variety are also occupied. When the opportunity for their own variety comes, they can't trade it.
After suffering losses and reflecting, they reconfirm the variety they want to trade and set rules. After a period of time, they make the same mistake again, and the cycle repeats, leading to stable losses.In fact, whether it's the trading experts around me, myself, or many well-known investment gurus such as Buffett and Soros, we all only engage in the fields and types of assets we are good at, and we do not easily venture into unfamiliar directions.
This is because we all understand that unfamiliarity implies unknown risks, and you never know what consequences these risks might bring.
Firstly, each type of asset has different trend characteristics and varying degrees of compatibility with our trading systems. A good horse needs a good saddle, and sometimes a trading system also needs to be matched with suitable assets to achieve better results.
For example, in the foreign exchange market, assets like gold, crude oil, and stock indices have large fluctuations and fast movements, and they tend to move in one direction, making them suitable for intraday and trend trading. Intraday trading can create space for profit, while trend trading with large fluctuations can yield high profits.
On the contrary, assets like the Swiss franc and the euro have smaller fluctuations and deeper pullbacks, making them more suitable for range-bound trading.
Secondly, dealing with too many types of assets is actually very exhausting and can also dilute our positions.
Some people think that trading is just a matter of buying and selling, where is it so complicated? However, this is not the case. Trading involves many steps, such as monitoring trends, selecting entry points, entry patterns, calculating positions, setting stop losses, take profits, and standards for adding or reducing positions.
Under so many steps, if you monitor too many assets, it can be very energy-consuming. Sometimes, as soon as you seize an opportunity in one asset, another opportunity arises, or even multiple assets present trading opportunities at the same time. In such cases, you might end up in a flurry, either making wrong orders or missing opportunities.
Additionally, our capital is limited. With too many assets, we can only spread our positions thin. If you trade 2 lots in 5 different assets versus 1 lot in 10 different assets, the total position remains the same. However, you will find that having more assets only makes your trading busier without significantly improving the trading results, so it makes sense to reduce the burden on the types of assets you trade.
Furthermore, not focusing on certain assets but randomly selecting them can lead to significant problems.Because trading systems inherently have their own success rates, constantly switching between different trading instruments randomly would not yield the expected success rate of the system itself. For instance, if a trend-following trading system has a success rate of 30%, by consistently trading a single instrument during a period of consolidation and experiencing a series of losses, the probability of success in the next trade would increase. If we persist in trading this particular instrument, the certainty of this probability would be quite high. However, if we switch to random instruments, the probabilities would become disordered again.
The trading market has a vast capacity, especially in futures and forex markets with leverage. Thoroughly understanding and mastering the patterns of a few specific instruments can lead to endless earning potential.
Like myself, I focus on a relatively fixed set of instruments. Once the instruments are determined, I can devote more energy to researching technical aspects, which is also very helpful for improving my trading skills.
Many friends diversify their instruments to spread risk, believing that one should not put all eggs in one basket. Diversifying risk is certainly not wrong, but it must be done with a plan and rules, rather than blindly switching instruments to satisfy the desire for random trading.
Next, I will share my approach to diversifying risk.
4. My Approach to Diversifying Risk
I have capital invested in three markets, but the proportion of investment and the expected return vary.
In the stock market, I engage in long-term trading, which accounts for about 30% of my capital. I aim for a return level of 15% to 20%. Each time, I choose 4 to 5 stocks, all of which are leading stocks in their respective industries, with no risk of delisting. Even in the face of extreme market conditions, the maximum drawdown would not exceed 20%, ensuring that it does not cause significant damage.In the futures and forex markets, I pursue a relatively aggressive return, aiming for an annualized rate of about 30% to 40%. Moreover, I establish very strict rules for capital management to ensure that I do not experience excessive drawdowns. At the same time, I diversify my positions across 8 to 10 different instruments (beginners can suffice with 4 to 5), all of which are ones I am particularly familiar with and have a deep understanding of, thereby further diversifying the risk.
So, the correct approach to diversifying risk is to allocate a portion of your funds to more stable investments to ensure that your main base is secure. Then, allocate another portion of your funds to more aggressive investments, while controlling your positions and distributing them among a few instruments you are familiar with. The key is not to have too many, but just enough that you can calmly and confidently manage each trade.
Therefore, in trading, the ability to focus is crucial. Only by focusing can you fully commit and delve into deeper insights. Nowadays, every industry is highly competitive, and the pressure is immense. Only by going deep enough can you earn money that others cannot.