In this world, everything can be arranged, except for your heart. Losing anyone in this world is not scary; it doesn't matter. The only thing that matters is losing yourself. Afterward, there is a long, long road that you have to walk alone, relying on your own abilities to complete. The world will not repay your efforts just because you give; nor will it require others to treat you equally based on how you treat them. The hardest thing about living in this world is to maintain a sense of humility and peace, and this humility comes from sincere inner feelings and practical efforts.
You must believe that every person and every event you encounter in your life has its value and significance. Some people teach you love, some events teach you growth. Even if they only leave a shallow mark on your journey, they are a valuable treasure. At least at some point, you understood life, and you understood yourself. Let’s think this way: efforts with results are training, while efforts without results are refinement. Regardless, every kind of encounter is an indispensable element of your life. Before having a high win-rate contract trading system and perfected capital management, it is very difficult to have a good mindset. Don’t tell me that your mindset is good while holding losing orders; I can only say you have reached the highest realm of loss, and you can even deceive yourself! Mindset = Good capital management + Win rate > 30% trading system. In the cryptocurrency contract market among winners, technology takes a back seat; the core they operate on is capital management, risk control, and trading strategy.
The reason they can make money is that losers do not execute, or do not strictly execute, or do not fully carry out capital management, risk control, and trading strategies.
In a confrontation between two armies, if technical analysis is a weapon, both sides are definitely evenly matched; however, if one side believes that the brave will win when two strong forces meet, recklessly charging in despite the gunfire, they will surely be defeated. They did not lose in weapons and equipment, but in ignorance.
One must protect defensively. Not understanding combat strategies or troop deployment in our trading means risk control, trading strategy, and capital management.
If everyone strictly, scientifically, reasonably, and comprehensively executes and adheres to capital management, risk control, and trading strategies, only then can technical analysis play a role in influencing the winning or losing pattern. The winners only focus on capital management, risk control, and trading strategies, never nitpicking about technical analysis. Their requirement for technical analysis is very coarse. This is enough to allow them to continue being winners for 10, 20 years. Because their vision is broad and their understanding profound, they cannot be compared or contended with traders who only focus on technical analysis. The losers will not understand what power influences trading; they delve deeply into piles of technical analysis books and can't extricate themselves. The reason why losers and winners are about equal in technical analysis is also due to the inherent shortcomings of technical analysis itself, such as the Dow Theory and trend judgment, which can only confirm the trend after it has moved 30%, leading to missed opportunities for bottom-fishing or peak-escaping.
Technical analysis, at its core, is a probability issue. No matter how good your skills are, you only have a slightly higher chance of accurately judging the situation, having about 50%-60% confidence; if someone is less skilled, they will only have a slightly lower probability, around 40%-50%, which isn't much of a difference.
For example, after a trend reaches a peak and moves about 30%, shouldn’t there be little disagreement at the top? A portion of traders with different opinions may say it’s close to the top. From the overall trend perspective, the views are basically the same, and the disagreement can be ignored, not causing a significant difference in winning or losing.
But if you go all-in here, the problem arises: our traders participate in trends, they can see the big direction correctly, but going in heavily can lead to being shaken out and losing money due to small adjustments that aren’t significant. A moment of distraction can mean missing out on the trend, which is very regrettable.
Building a position with light trades isn’t feared because the loss is minimal; it’s just following the market, not shaken out or driven away, and all the way making the trend work. This small position can be dynamically managed, adjusting positions as needed to make big profits.
The difference in technical level between both sides is at most 30%. If you think you have a high level and go in heavily without executing capital management; those with slightly lower levels, being somewhat self-deprecating, go in lightly and test the waters, thus managing their funds.
In the end, those who get shaken out and lose a lot of money are usually the ones who entered with heavy positions thinking they were skilled; while those with slightly lower skills will follow the trend down, even if their profits are not significant. However, they have widened the gap in funds compared to those who went in heavily. After a few cycles, in one or two years, the difference between them is like that between a beggar and a millionaire.
So how do we do capital management well? The trading system is a prerequisite for capital management, and we need to understand what capital management is. From forecasting to not forecasting is a hurdle that requires a bit of enlightenment; once understood, it will be clear. Before understanding, even a face-to-face explanation for ten or fifteen days won’t yield results.
A mature trading system should include capital management, and capital management should not exist independently of the trading system. Remember, it should not be independent, not that it cannot be. Li Jun personally believes that to accurately understand concepts like trading rules, systems, and capital management, one must start from risk control to achieve capital management for everyone's understanding.
Li Jun still uses the moving average trading system and Bollinger Bands discussed earlier, golden cross to go long, dead cross to close long and go short.
Assuming that the accuracy of the moving average trading system is 30% and the average win-loss ratio is 7:3, then, not considering transaction fees and costs, the entire trading system cannot make money.
How to understand? For example, in trading a hundred orders, 30 orders make money and 70 orders lose money. The average profit for winning orders is 70,000, and the average loss for losing orders is 30,000. Calculating it, of course, ends up with nothing.
In reality, trading rules and systems based only on indicators can mostly only avoid losses.
Assuming that through backtesting long-term historical data, the system's maximum loss reached 80%.
Thus, it can be said that this system not only does not make money, but the risk coefficient is also very high. A maximum drawdown of 80% is terrifying. How should we understand this? If you have one million in funds, and the maximum loss reaches only two hundred thousand, even though the final result is that you can still earn back...
However, the risk coefficient during the process is extremely high; it can be said to be out of control. Encountering a terrifying black swan could lead to a loss of up to a million at any time, but can a system that is highly risky and not very profitable be completely unusable?
The answer: Definitely not.
First, let’s look at the risk: the system's maximum drawdown is 80%, can this risk be reduced?
Of course, if we reduce the position by half, then the overall risk coefficient will also be reduced by half, and the maximum drawdown will change to 40%. What if we reduce the position to 25%? Then wouldn't the maximum drawdown also drop to 20%?
When we write the rule of 'controlling the maximum position within 10%' into our trading system, we get a risk with a maximum drawdown of 10%, a system that doesn’t make money. Note that this 'controlling the maximum position within 10%' is a simple and straightforward rule in capital management, mainly used for risk control.
The control of trading system risk comes from reasonable capital management.
Getting off-topic, everyone knows that you can't operate with a full position, but most people don’t know why you can't operate with a full position. The answer lies in capital management, which amplifies profits. For us, a low-risk but not very profitable trading system is actually of little use. Now, let's get to the point: how can we make this system achieve positive returns?
In actual operations, not changing the opening and closing rules does not change the 30% accuracy. We also cannot change the 7:3 win-loss ratio; although it’s frustrating, it’s not without a solution. We can change the position. If we can make the average position of profitable trades 10% and control the average position of losing trades around 5%, then wouldn’t we achieve profitability?
Capital management plays a role in maximizing profits here. Good capital management can turn a system that originally does not make money into a profitable one, and a system that makes small money into one that makes big money.
These days I am preparing for the launch of a divine single!!!
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