The core of trading profit is how to deal with continuous stop losses?
Continuous stop losses can arguably be the most painful aspect of trading, and it is a subject that we must confront if we are to conduct successful trades. The reactions of most people to consecutive stop losses are quite similar; they experience intense fear, impatience, and even anger. Initially, one might feel quite confident, but after encountering a series of stop losses, most individuals find it impossible to remain calm.
Mistakes once or twice can be a bit depressing, but after three to five errors, anxiety starts to set in. After seven or eight mistakes, fear begins to creep in, and after more than ten, anger takes over. One might feel as if the market is conspiring against them, with every move they make turning out wrong. The uncertainty of whether the future will continue to be a string of errors is truly terrifying, making trading increasingly desperate.
Consecutive stop losses are somewhat akin to the ancient punishment of lingchi, where a dull knife slowly cuts into you, feeling as if your heart is being continuously hammered by a mallet, causing a sense of suffocation.
At this point, many people simply can't hold on any longer. This was the case for me in my early trading days; once my emotions took over, I disregarded all considerations of risk and strategy, going all-in with heavy positions, even betting everything on a single trade, without a care for the consequences, because the frustration was simply unbearable.
Later, when I reviewed my trading history, I found that the most severe losses did not occur during periods of consecutive stop losses, but rather in the aftermath, during the period of irrational exuberance, which essentially led to a series of explosive losses out of anger and embarrassment.
So, is the key to whether trading can be profitable all about how to face consecutive stop losses? Indeed, it is.
Since no trading strategy can adapt to all market conditions, there is no such thing as a holy grail strategy that can capture every market movement. Understanding this principle is half the battle in successful trading.
Given that a trading strategy can only respond to a specific type of market condition, it will inevitably fail in another. For instance, a trading system designed for a range-bound market will fail in a trending market, leading to consecutive stop losses during such times.
So, how should we face consecutive stop losses? How can we accept them with equanimity and maintain rationality? Let me share how I personally handle it, focusing on the following three points:1: You must know how many times your trading system will be wrong in a row.
Many friends have seen the story in "The Turtle Trading Rules," where the author teaches his friend a trading method. However, after being wrong 17 times in a row, his friend loses confidence and stops executing, taking a loss and exiting. In the end, the author himself withstands the consecutive losses and waits for the big market trend that turns losses into profits.
The biggest difference between the author and his friend is that the author is very familiar with this trading system because he created it himself. He knows the performance of this trading system, how profitable it is, what kind of consecutive stop losses it will encounter, and how much the maximum drawdown will be, he knows it all. On the other hand, his friend knows nothing about this trading system, has not tested it himself, reviewed it, and even if he knows the effectiveness of this trading system, he does not fully believe it.
Fear comes from the unknown, and it is to be expected that the author's friend cannot continue to execute.
So if you want to have confidence in your trading system, you must fully understand the performance of the trading system. For example, a large number of reviews, a large number of simulation plates, and even a large number of real plates can test the effectiveness of your trading system.
When a system has the maximum number of consecutive losses in the past few decades, this number will also be roughly the same in the future market, because the market is always repeating, which is also the source of your confidence.
Eliminating most of the unknowns and strictly controlling the stop loss, you will not have such a fear of consecutive losses, and the execution will naturally be strengthened.
2: Control the position, trade with a light position.
The sentence I have always said before is that 99% of the psychological problems in trading come from the position being too heavy.
If you trade with 10,000 yuan, you may lose it all, and you may not feel so bad. But if you trade with 200,000 yuan, any fluctuation of one or two ten thousand yuan will make you feel extremely uncomfortable, for fear of a little more fluctuation.At this point, many people fall into a kind of "God's perspective," thinking, "If I had known I would be wrong for more than ten times in a row, I wouldn't have taken such a large position before." Now, if I stop the loss, I can lose less, but I'm not willing to do it. After stopping the loss, what if the market reverses? The profit will also be less.
Tied up in this dilemma, all attention is no longer on the original trading strategy, but is controlled by one's emotions. The final decision made will definitely be emotional and irrational.
The rules for capital management in our trading system must be closely linked to the specific performance of the trading system. In the previous point, when you know the consecutive error performance of your trading system, you can formulate your capital management rules based on this data. For example, if the degree of consecutive errors is very high, then the position must be reduced, otherwise, no one can hold on. If the success rate is relatively high and there are not many consecutive errors, then the position can also be slightly increased to ensure that your profits are not too low.
3: Moderately optimize the trading system to reduce the number of consecutive errors.
I believe everyone has a deep understanding of how uncomfortable it is to have many consecutive errors. The highest number of consecutive errors in my early trading system also reached 18 times. I really couldn't stand this amount of consecutive errors, so I optimized my trading system. I improved the success rate of my trading system and the stability of the system by filtering through multiple cycles and multiple indicators.
Correspondingly, the profit and loss ratio will definitely be reduced, and the overall profit will be reduced to some extent. However, the trading is not so uncomfortable, and it can be persisted. A trading system that can be executed is a meaningful trading system.
So I would rather sacrifice some profits to ensure the executability of my own trading strategy. After all, the money that can be earned is my own money. Let's encourage each other.