Understand these basic logics, and the trading level will rise sharply
Many friends are in a state of confusion when making trades.
Many people believe that as long as their trading skills are high enough, they can definitely make a profit, and it will be a substantial profit.
Therefore, everyone is looking for shortcuts, whether it's following others or searching for the Holy Grail in trading. After going around in circles, they find that not only have they not reached profitability, but they are also more confused.
In fact, as long as you take the time to understand some basic logic of trading, it is not as difficult as you might think. However, most people do not have the patience to learn and understand, and they start in a hurry, which can only lead to tragic results.
So today, I will share 8 basic logics in trading that I consider very important, to help you organize your thoughts. These logics are conclusions I have drawn from a lot of losing experiences, and I believe they will be helpful to you.
1. Think about exiting before entering, not the other way around.
Often, friends ask me: "Hey, I'm in a floating loss, how should I set a stop loss for this position? What position should I look at for taking profit?" At this time, I would counter-question: "Where was the stop loss you set before you opened the position?"
Many people get on the train first and then buy the ticket, regardless of the consequences, just to get the trade done first. As for the stop loss and take profit, they decide during the trading process based on their mood.
Undoubtedly, this approach to opening a position is extremely risky. If you suffer a loss after entering, because you were not prepared in advance, you start to panic. In the panic, you might delay the stop loss, turning a small loss into a big one. It's also possible to arbitrarily choose an unreasonable stop loss position and get washed out by the market.
Orders without a profit-taking standard will also cause problems when they are in profit.Because human nature inherently fears loss and prefers the sense of stability that comes with securing gains. Therefore, if a profit-taking position is not set, it is highly likely that one would not be able to resist closing the position before reaching a significant profit target, ultimately missing out on a large portion of the potential profit.
Thus, the approach of getting on the train first and buying a ticket later is not feasible, whether viewed from the perspective of losses or profits. It represents unplanned, random trading, which could very likely amplify losses and reduce gains, resulting in a situation where losses outweigh profits.
2. Trading cannot be profitable every day.
Recently, a friend told me that he had only six to seven hundred US dollars in his account and made over 50 US dollars in a day. He then thought that if he could "make a profit of 7% every day, he would earn 10,000 RMB in a month," and asked me if there was any truth to this idea.
I too had such fantasies, especially when I was making profits, calculating how long it would take for me to achieve financial freedom if I could consistently earn this much every day.
However, trading is not like working a job; it cannot guarantee a fixed income. Where is a trade that can make money every single day? Even the champions of futures trading competitions have periods of drawdown.
Moreover, when we first start trading, it is easy to encounter beginner's luck, as there are no strict trading rules, nor a very strict stop-loss policy. We tend to hold onto positions, or add to our positions when we are losing, and the market often fluctuates in an upward or downward trend. When the market corrects, we make money in a confused manner.
After making money, we naturally regard this pattern of fluctuating market movements as the truth of market operation, believing that future market trends will follow suit, and we start to open and close positions recklessly and presumptuously.
The result is that when we eventually encounter a trending market, our ideas become ineffective, and when all the money evaporates, we feel foolish.
That is why I always advise beginners to review past trades and do more paper trading, because when you see decades of market trends unfold before your eyes, your understanding of the market will not be so one-sided, and it will be impossible to entertain the idea of making a profit every day.3. Most people tend to choose the option that they know is wrong but is easier to accept, rather than the correct one that is hard to swallow. Everyone understands the importance of cutting losses. When a trade reaches the stop-loss condition, admitting defeat by stopping the loss is the most correct choice, but it is also the most difficult to accept. So people start to convince themselves, choosing a compromise between stopping the loss and what is acceptable.
For example, if one has made a trade of 2 contracts and it reaches the stop-loss level, they might stop one contract first and wait to see what happens with the other. Or they might widen the stop-loss level a bit, waiting to see if the market will rebound. Or when it's time to stop the loss, they might choose to lock the position, thinking that as long as the lock can be unlocked, it's not a loss. But in reality, locking the position has already locked in the loss, and they have to pay an additional fee. Holding onto this locked position is a constant source of stress and can also affect other trades.
Or when a trade is profitable, holding the position until the target level is the most correct choice, but as soon as the market corrects, they fear a reversal. In this case, the approach is the same: close part of the position to gain psychological comfort, or lower the profit-taking target.
This state is the result of the collision between human rationality and emotion. What we often talk about in trading, the need to overcome human weaknesses, is also reflected in this aspect. Trading is a game between one's desires and reason, and only when reason prevails can trading potentially lead to profitability.
4. The most advanced trading is to wait for the opportunity that belongs to you.
Often, friends will show a settlement slip and ask: This person is amazing, he held onto a trend from start to finish and caught the whole wave, how did he manage to do that?Some people say that today's market at 3800 points only made a small profit by taking profit, but if it had been held from 2160 to 2190, it would have been a huge gain.
In fact, where does such a thing as holding from start to finish exist in trading? For example, gold started to rise from 1809 last October, and it rose to 2145 last year, which can be considered a trend from start to finish. However, gold has now risen to 2193, so it seems that closing the position at 2145 was a bit early.
The financial market is vast and inclusive, and each technical analysis system can only interpret a small part of the opportunities in the market, and this small part of opportunities is enough to achieve profits.
In our trading system, holding the part of the market that belongs to us and capturing the beginning and end within our trading system is what constitutes a successful trade.
Everyone, think about it: lions hunt on the savannah, and crocodiles hunt in the water; they each have their strengths and live well. But if you let a crocodile go to the savannah to catch antelopes, it might starve to death.
The same principle applies to us traders; the most important thing is to master a technical analysis system and select a trading opportunity that belongs to oneself, which is enough to sustain us.
5. To catch fish, one must understand the patterns of their movement.
Look at the picture below:
The image shows the daily K-line chart of spot gold. On the daily K-line chart of gold, a clear trend pattern can be observed.After a continuous trend, the market will enter a period of consolidation, and after a sustained period of consolidation, a trend will gradually emerge.
After the amplitude of daily K-line fluctuations has contracted for a period (blue rectangle in the chart), the amplitude will expand (green rectangle in the chart). This is somewhat similar to the cyclical alternation of the four seasons, which has a certain regularity.
Additionally, within the 24-hour cycle of each day, there is also a pattern of alternating spatial magnitudes.
Different types of assets have different patterns of amplitude, with some like gold and crude oil having larger fluctuations, making it feasible to aim for a profit target of around 100 points in intraday trading. However, for assets with smaller fluctuations such as the euro against the US dollar or the US dollar against the Swiss franc, intraday trading targets might be around 50 points.
Market trends and the characteristics of different assets vary. In practice, to excel in a certain type of trend, one must understand the regularities and characteristics of that trend. Similarly, to excel in a certain asset, one must understand its attributes.
For example, in the chart above, gold's daily K-line contracted continuously for two weeks, and after 10 trading days, the probability of a significant price movement became particularly high. At such times, one could hold on to some positions to try to catch a trend.
I remember the year when I first started trading, I had no awareness of market trends. I spent all day and night in front of the computer, fishing indiscriminately. In fact, no matter how many nets you cast in a river without fish, it's useless. By finding the location of the fish schools, every cast will yield some catch.
Understanding the regularities of one's trading trends and the characteristics of the assets is the foundation of profitability.
6. There is no ideal state in any trade.
I once discussed a question with friends: Is there a trade in this world with a 100% success rate? The answer is that only a logic like the Martingale system in casinos can achieve 100% success, but this success has a prerequisite: you must have an infinite amount of money.With an infinite amount of money? Then why trade at all? This is itself a paradox.
Trend trading will inevitably experience profit giving back, and range trading will certainly not yield substantial profits. Trading with increased positions will definitely amplify risks, and during drawdowns, profit giving back can be severe.
All trading methods cannot achieve our ideal state, and all have their regrets.
This is the reality of trading that cannot be changed, and only by changing our own definition of an ideal trading state can we adapt.
For example, having 1 million in the account, with an ideal standard of earning 200,000 per year to support the family, if achieved, this is considered reaching an ideal state.
Defining one's own ideal trading standards is something everyone must do, and of course, it must be a down-to-earth, achievable goal. It must not be a standard of continuous doubling, as the difficulty of achieving it is too great, and the long-term results are generally not good.
7. Try not to make trades when in a bad mood.
When I chose to start trading, my then-girlfriend did not support me. In her view, it was not a proper occupation. After I suffered losses, her opposition became even stronger, and we often argued.
Every time we argued over trading, I would go back to the study angry and continue trading, always incurring losses. At first, I thought it was the bad luck from the argument that caused the losses. It took me years to realize that it was actually because when I was angry, my analysis of the market was not objective, my understanding of risk was more aggressive, and my patience for waiting for trading signals and market conditions was worse, which is why I lost.
What's even more terrifying is that when in a bad mood, trading turns into a venting of anger, contrarian trading, heavy position trading, and frequent trading, which lead to serious losses. Most of these situations occur when one is in a bad mood.So in practical combat, it is essential to intentionally regulate emotions. When you feel tired, mentally agitated, especially after an argument with someone, it is best not to engage in trading.
Not trading when in a bad mood might cause you to miss out on some profits, but it will certainly help you avoid serious losses due to impulsiveness, which is definitely a wise choice.
8. Before applying trading techniques in real combat, they should be tested and proven effective through backtesting.
There is a very perplexing situation where traders, after trading for a while, come back to ask me if their stop-loss strategy is okay, or if trading solely with the 10 and 30 moving averages is viable.
Many people risk their hard-earned money with a trading system whose profitability is uncertain, only to reflect on it after encountering problems, such as questioning the stop-loss settings after a series of losses.
This approach is absolutely wrong.
First, risking real money without knowing if the trading system can make a profit may lead to unnecessary losses.
Second, addressing issues in trading as they arise can sometimes lead to short-sightedness and irrationality. For example, after resolving the stop-loss issue, the profit-taking issue arises, followed by the opening position issue, and so on. Problems keep emerging, money keeps being lost, time keeps being wasted, and energy keeps being drained, eventually becoming a consistent loser in the market.
If you find yourself in a losing position, pause and consider whether your trading system has been tested and proven effective, whether the framework is complete, whether it can generate profits, how the drawdown is, and whether the capital management is adequate, among other things.Only by understanding these issues can one avoid confusion when entering the actual combat. It's not too late to start trading after making up for the necessary homework. Don't wait until losses occur to start looking for solutions; then, what you're thinking of won't be solutions but rather a desperate search for any straw to clutch at, making trading even more difficult.