There is no trading system that guarantees profits without losses.
A trading system is essentially an operating system that can be understood as a complete human-computer interaction system, where humans use this system to make computers work; biologically, it is similar to a conditioned reflex, that is, 'when signal A appears, action B must occur.'
A trading system is a complete set of signal rules regarding entry, exit, buying and selling stop-loss, and take-profit.
There are many misunderstandings regarding trading systems. Some people believe that their inability to profit is due to a lack of their own trading system, and that once they have a trading system, they will be able to achieve profits. Others believe that their existing trading system is not good enough, which is why they need to find better systems to achieve excess returns. Some firmly believe that there is a magical trading system in the world, and as long as one follows its operation, one can profit without losses.
Are these views true and credible?
First, it is essential to clarify that there is no 'perpetual motion machine' or 'elixir of life' in the world, and naturally, there will not be a universal trading system that is always stable and profitable. If such a system existed, smart people would have found and utilized it long ago.
Additionally, even possessing an excellent trading system does not guarantee stable profitability. An excellent trading system first requires its users to have strong execution capabilities, able to follow its instructions 100%. Furthermore, a good trading system may not suit everyone. Each individual needs to find a trading system that fits them, which cannot be measured by standardized 'good' or 'bad.'
To find a trading system that suits oneself, it is first necessary to correctly understand and position the role of the trading system.
A trading system is similar to military guiding principles. Completely adhering to these guiding principles may not guarantee victory in every battle, but at least it ensures that one will not suffer a disastrous defeat and leaves subsequent opportunities. The trading system operates at a strategic level, while the combination of 'operational mindset' and 'operational strategy' belongs to the tactical level, and specific trading actions are tactical expressions.
By correctly understanding the role and limitations of a trading system and finding a suitable system that fits one's characteristics, one can achieve better results in trading.
How to evaluate a trading system
When evaluating a trading system, I believe one should only focus on one core key indicator: the 'profit-loss ratio.' The profit-loss ratio refers to the average profit amount divided by the average loss amount.
For example, you invest 1 million yuan, trading 10 times according to a certain operating system, with 4 profitable trades yielding 150,000, 250,000, 350,000, and 450,000 yuan respectively; and 6 losses of 100,000, 150,000, 100,000, 50,000, 70,000, and 200,000 yuan. At this point, the average profit when profitable is 300,000 yuan, and the average loss when losing is 111,700 yuan, giving a profit-loss ratio of 30/11.17 ≈ 2.69. If you continue to trade with this system, whether it is 100 times or 1000 times, based on a profit-loss ratio of 2.69, you can theoretically achieve profits. A profit-loss ratio below 1 indicates a loss.
However, when objectively evaluating, we need to consider certain redundant factors. Personally, I believe that the profit-loss ratio should not be lower than 2. Specifically:
A profit-loss ratio of 3 can be considered passing, equivalent to a score of 70;
A profit-loss ratio of 4 can be considered good, equivalent to a score of 80;
A profit-loss ratio of 5 can be considered excellent, equivalent to a score of 90;
A trading system with a profit-loss ratio above 5 can be considered perfect.
It is important to note that trading systems with a profit-loss ratio above 5 are very rare. It is recommended that everyone calculate the profit-loss ratio of their long-term trading system (or buying and selling rules) to better assess its effectiveness.
What elements need to be included in designing an operating system
Before establishing an operating system, we should first ask ourselves: What is the purpose of investing? Is it to get rich overnight? To achieve steady appreciation? Or to quickly increase value? Additionally, what is the expected return rate? Is it 100% in a year? 100% in a month? 30% in a year? 30% in a month? 200% in a year? Or 50% in a year? These questions will greatly influence how we design our operating system.
Moreover, regarding risk, what is our tolerance and risk preference? Can we endure a drawdown of more than 30%? Can we tolerate a small drawdown of under 20%? Can we only withstand a slight drawdown of under 5%? Or can we not tolerate any drawdown at all? These questions about risk must also be considered. If these issues are not clarified, blindly establishing an operating system is of little significance, at least not the most suitable for oneself.
A complete trading system should include the following seven elements:
Cycle judgment: Understand the general market trend and determine the current market cycle (such as bull market, bear market, sideways market, etc.).
Operational mindset: Clarify the basic philosophy and strategy of operation, whether it is to pursue quick entry and exit in short trades or to hold long-term.
Selecting coins: Choosing potential stocks based on certain standards and methods.
Timing: Determining the best moments to buy and sell.
Buying and selling rules: Formulating clear buying and selling strategies, including entry and exit conditions.
Fund management: Reasonably allocating funds to avoid excessive concentration or dispersion, ensuring efficiency and safety in fund usage.
Risk control: Formulating risk management strategies, including stop-loss mechanisms and position control, to manage and reduce investment risks.
By comprehensively considering and integrating the above elements, one can establish a trading system that suits oneself, thereby more effectively achieving investment goals.
Next, let's take a closer look.
1. Cycle judgment
Going with the trend is the primary principle of investment. When the overall market is rising, the success rate of our various strategies, coin selection, and timing abilities will significantly increase. Even if the strategies and timing abilities are not perfect, in an upward market environment, it is still possible to profit from upward trends. Moreover, if one judges that the market is steadily rising, the mindset for holding positions becomes more stable, even daring to buy at low points, thus reducing the cost of holding coins and maximizing profits. Conversely, if there is no clear judgment on the overall market trend, the mindset for holding positions will be unstable, easily leading to overreactions due to slight fluctuations, resulting in distorted operations.
Moreover, cycle judgment will provide important references for subsequent operations. In a bull market, all buying and selling should be heavily invested and concentrated; in a bear market, all buying and selling should be lightly invested and diversified.
2. Operational mindset
The operational mindset can also be referred to as operational strategies under different market conditions, but this operational mindset can only be determined based on judgments about the overall market. Therefore, accuracy still depends on the ability to judge the overall market. The operational mindset is akin to planning a campaign, determining how long to fight and the scope of the battlefield, which must be set in advance. One cannot modify the battle plan on the fly, arbitrarily increase troops, or change the direction of the campaign.
3. Selecting coins
Especially in a bull market, the importance of selecting coins is even more pronounced. To achieve excess returns, one must carefully select the coins held and, during a bull market, avoid frequent switching of coins. Frequent switching may lead to missed opportunities for price increases, often resulting in the sold coins rising significantly while the held coins perform mediocrely. The key to profits in a bull market lies in a combination of heavy investment and holding time.
For large institutions and big funds (with management scales exceeding 100 million yuan), the importance of selecting coins is even more significant. Global long-only equity funds rely on stock selection as their unique advantage, which is also a key marker for distinguishing different funds. Timing operations usually assume that one can outperform the market. Operators managing funds in the millions may still profit through timing, but once the scale of funds increases, the effectiveness of timing significantly declines.
So what characteristics should a coin with excess returns possess? We can view it from the perspective of the market makers. If you are a market maker or an institution, or what is called a main force, with a large amount of capital, which coins would you choose to operate?
First, the circulation volume should be small, but not too small; too small a volume leads to poor liquidity, making it inconvenient for capital to enter and exit, preventing it from operating.
Second, there are significant trending themes without historical legacy issues, such as those previously manipulated by major market makers or with poor market image.
Third, there should be concrete on-chain data support or conditions for future performance improvements so that when the coin price reaches high levels, 'performance improvement + high distribution (such as airdrops, dividends, on-chain rewards, etc.) + themes' can complete the exit without causing a significant drop in the coin price.
4. Timing and buying and selling rules
Timing is the precise identification of entry and exit timing, mainly divided into medium-term fluctuations and short-term speculation. Buying and selling rules are clear definitions of trading discipline. For instance, buying must meet the technical indicator's buying point requirements and should be a short-term buying point, with a need for a quick rise after buying. Timing is the primary means of controlling risk; even in a bull market, significant adjustments may occur, and the core role of timing is to avoid these adjustments and major bear markets. If market conditions are poor, it is advised to stay on the sidelines.
In a trading system, buying and selling rules should possess a certain degree of flexibility and subjectivity, accounting for about 20% to 30%. Completely fixed buying and selling rules will lead to programmatic trading, lacking adaptability. Buying rules differ based on various operational mindsets and market conditions, with different market scenarios producing different buying points. However, there is one basic principle that must not be violated: buying must be based on technical buying points.
Selling rules also change based on market conditions and operational mindsets. Different expected returns will lead to different profit-taking strategies. Selling does not necessarily have to wait for a technical selling point to appear, as that often results in one or two bearish candles appearing, leading to significant profit loss. Therefore, selling points require a certain degree of anticipation; once the profit-taking position or potential high point is reached, one can consider selling.
Through such rule settings, traders can respond flexibly to different market conditions, maximizing returns while effectively controlling risks.
5. Fund management
Fund management is a set of disciplined management regulations. For example, 'Every accounting year, transfer out profits once a 10% profit is made'; 'After opening a position for the first time, open new positions only after making a profit' etc. An important point to consider is the 'leverage issue.' Of course, many big players in the crypto space achieve financial freedom through leverage; thus, whether or not to use leverage and how much leverage to use varies by individual. However, it is important to note that there is a saying in the investment industry: 'profits and losses come from the same source,' meaning that the places that make you money are often also the places that cause you to lose money. There are many who become wealthy, but there are also many who face liquidation. For beginners, it is advised to use leverage cautiously, as leverage can amplify emotional fluctuations caused by market volatility, leading to undesirable trading outcomes.
6. Risk control
Risk control is a set of iron rules; everyone has different experiences and regulations. Risk management clauses play a crucial protective role during operations, ensuring one does not make mistakes due to 'greed' or 'complacency.' Additionally, firmly remembering risk management clauses can help maintain calmness and avoid unnecessary losses from emotional fluctuations.
Trading system example
A trading system provides clear entry and exit signals, making trading behavior more standardized. Only when the system issues a signal should buying or selling be executed; otherwise, one should patiently wait. For existing positions, regardless of profit or loss, one should maintain the position; for those with no positions, one should wait for the system signal to appear before taking action.
The reason a trading system is referred to as a standardized operating system is primarily to avoid arbitrary trading by investors. Human nature has its weaknesses, and mindset is a crucial factor in trading. Although subjective trading can occur, even the simplest system can provide certain norms. For example, a moving average strategy: buy when the price is above the line, sell when it is below. Even rules like buying stocks on a smoggy day in Beijing and selling on a sunny day are a form of system. Similarly, there are simpler so-called 'systems,' such as buying stocks on odd days and selling on even days. Although these systems may not guarantee profits, at least they provide a complete set of rules to help traders avoid emotional trading.
The most complex trading systems require top mathematicians to establish several complex mathematical models based on massive data, conducting automated trading with the help of computers. For ordinary traders, the trading system is not necessarily the simpler the better, nor is it the more complex the better, but rather the more efficient the better; simplicity, complexity, and quality have no inherent correlation.
For example, in the simple moving average system, the most famous is the Granville Eight Method.
The four major buying rules proposed by Granville:
(1) When the average line transitions from descending to leveling off to ascending, and the stock price breaks through the average line from below, it is a buying signal.
(2) Even if the stock price falls below the rising average line, if it soon turns upward again and operates above the average line, it is a signal to add to the position.
(3) If the stock price falls but does not break the average line and begins to rise again, while the average line continues to rise, this is still a buying signal.
(4) When the stock price falls below the average line and moves away from the average line, a strong rebound may occur, which is also a buying signal. However, remember that after the rebound, it will continue to decline, so one should not be overly attached. This is because the overall trend has already weakened, and prolonged struggles are bound to lead to being trapped.
The four major selling rules proposed by Granville:
(5) When the moving average transitions from rising to leveling off to declining, and the stock price falls below the average line from above, it is a selling signal.
(6) If the stock price rebounds and breaks through the average line but soon falls back below the average line, while the average line is still declining, this is also a selling signal.
(7) When the stock price falls below the average line and then rebounds towards the average line but is stopped and falls back without breaking through the average line, this is still a selling signal.
(8) When stock prices surge rapidly away from the rising average line, investment risks surge, and a pullback may happen at any time, which is another selling signal.
In summary, the Granville Eight Method is a trading method that uses moving averages to analyze price trends, and it should generally follow these rules:
When the average line is rising, it is a buying opportunity; when it is declining, it is a selling opportunity. When the average line transitions from falling to rising, and the stock price breaks through the average line from below, it is the best buying time; when the average line transitions from rising to falling, and the stock price falls below the average line from above, it is an important selling time.
The Granville Eight Method is one of the simplest trading systems that everyone knows, but it seems somewhat too general and needs to be specifically adjusted in different markets.
