Can you share a profitable trading system with simple indicators?
When it comes to trading systems, many people tend to shy away from them, as they perceive them to be complex and with high barriers to entry. As a result, before delving deeply into the underlying logic of the entire trading system, people often give up prematurely or start looking for something with a lower barrier to entry, preferably something they can use right out of the box.
However, there are no shortcuts in this world. Today, I will still explain the structure and underlying logic of trading systems in the simplest way possible and then share a trading system as a case study.
This is similar to doing a set of problems; if you can only solve the problems themselves without the ability to think by analogy, you will still be confused when you encounter other variations in the real trading exam, and your trading will still be a mess. Only when you truly learn and understand it, will it become your own.
1. Classification of Trading Systems.
Trading systems are mainly divided into oscillation types and trend types, which are designed to deal with oscillating and trending markets, respectively (the two are not compatible, and there is no universal trading system that can handle all market conditions).
Therefore, an oscillation-type trading system will encounter a period of decline in a trending market, which means consecutive losses; similarly, a trend-type trading system will also encounter a period of decline in an oscillating market.
In terms of time frames, trading systems are divided into intraday, short-term, medium-term, and long-term.
That is why, when people communicate, they often hear phrases like "I do intraday oscillations" or "I do medium-term trends," which originate from this distinction.
2. Composition of Trading Systems.
The composition of a trading system involves several key elements, including:
- **Entry and Exit Rules**: These are the criteria that determine when to enter and exit a trade.
- **Risk Management**: This involves setting stop-loss levels and position sizing to control the amount of risk per trade.
- **Profit Taking**: Strategies to lock in profits when the trade is in a favorable position.
- **Position Sizing**: The process of determining the size of the position based on the trader's risk tolerance and market conditions.
- **Performance Metrics**: These are used to evaluate the effectiveness of the trading system over time.
Understanding these components is crucial for developing a robust trading system that can adapt to different market conditions and achieve consistent results.All trading systems must address these four questions:
(1) How to determine the direction?
(2) Where to open a position and enter the market?
(3) How to set stop losses and take profits?
(4) How to manage the position size?
Therefore, a trading system must encompass these four elements, and none can be omitted. This is also the basic framework of our trading system.
Next, we will use technical indicators to design a trading standard and fill it into the framework of the trading system.
For example, how do we determine whether the current direction is bullish or bearish? We cannot judge based on feelings; at this time, we need to rely on technical indicators to define a standard for judgment.
For instance, the commonly used moving average indicator has eight technical standards for judging trends. We can choose one or two of them as the standard for judging the current direction of being bullish or bearish.
For example, when a single moving average is crossed by the K-line from below, it indicates a bullish trend, and when the K-line breaks below the moving average, it indicates a bearish trend. Or when two moving averages form a golden cross, it is bullish, and when they form a death cross, it is bearish. Once the moving averages are added to a chart, the bullish or bearish direction can be immediately determined.This is defining a technical criterion using moving averages to judge the direction of long and short positions, which also completes the first step of our trading system. Other elements can be filled in the same way.
(You don't necessarily have to use moving averages; any indicator you are familiar with can be used, such as RSI, MACD, Bollinger Bands, trend lines, etc.)
After filling in the trading system according to the framework, it is equivalent to having completed the first draft of an article. At this time, it is essential to look back and verify the effectiveness of the trading system.
So at this point, we will test and refine the trading system using a backtesting software (you can search for it yourself), or directly use the demo account that comes with the trading software to test the effectiveness of the trading system, including the profit rate, the difficulty of execution, the number of consecutive errors, etc. Through testing, polishing, modifying, and perfecting, a trading system that belongs to oneself can be gradually formed.
The process of forming a trading system is roughly like this.
3. Share a mature trading system.
Note: This trading system is also provided as a case for everyone to have a clearer and more intuitive understanding of what a trading system is. It should not be used directly; it can be used as a basis for modification and improvement.
A swing trading system at the hourly chart level.
(1) Use the 60-period moving average as the dividing line between long and short positions, with the K-line above the moving average indicating a long position and the K-line below the moving average indicating a short position.
(2) After the direction is established, enter the position when the hourly chart level consolidation pattern breaks in the direction of the trend, with the stop loss set above the consolidation pattern, and a 3:1 risk-reward ratio is required, with the consolidation pattern lasting more than 30 one-hour K-lines.This requirement serves two purposes:
(1) To filter out some irregular patterns of consolidation.
(2) Thirty one-hour K-lines represent a consolidation pattern of 30 hours. After a prolonged period of consolidation, when the market breaks through, the speed of the break is fast due to the accumulated energy, and the space it runs is large, making it a high-quality break trading opportunity.
The chart shows a one-hour K-line chart of spot gold. After breaking below the moving average, the market begins a horizontal consolidation.
The duration of the consolidation pattern is 35 hours, which meets the standard of the trading system. After the market breaks down, a short position is opened, with a stop loss set at the high point above, and a profit-to-loss ratio of 3:1 is set. The order is successfully closed with profit at 1788 below.
A trading system must be combined with one's own trading habits and personality traits, and it needs to be gradually adapted to it. There is no magical trading system in the world that can cope with all market conditions, nor is there a trading system that can make a profit forever without losses, and there is certainly no trading system that can take you to sudden wealth immediately. Remember this well.