1️⃣ I summarized the commonly used technical indicators mentioned in the book into three categories:
Trend Following Indicators:
Including moving average (MA), MACD line, trend system, power tide and collection and distribution indicators, etc. Trend following indicators are synchronous or lagging indicators, which reverse only after the trend reverses.
Oscillators:
Helps identify reversal points. They include MACD-Histogram, Force Index, Stochastics (KDJ), Rate of Change, Momentum, RSI, Elder Rays, Williams Percent and others. Oscillators are leading or coincident indicators that often reverse before the candlesticks.
Other indicators:
Mainly refers to composite indicators, which can provide information about the strength of both long and short sides. They include the New High - New Low indicator, Put/Call ratio, Friends Index, Traders Index and other indices. They can be leading or coincident indicators.
It is useful to combine different indicators from different groups in order to offset the shortcomings of individual indicators while retaining their strengths. This is the goal of the "Triple Screen Trading System" mentioned in the author's book.
2️⃣Good trading mentality
The first chapter of the book, which the author considers to be the most important chapter, focuses on what he considers to be the most critical topic - trading psychology.
The author firmly believes that the key behind successful trading is having a good mentality.
So, what is a good attitude?
It requires us to look at transactions objectively and look at ourselves objectively.
Treating transactions objectively requires traders to focus only on the aspects that they can control - such as positions and stop-loss points, and to remain detached from the part that they cannot control - the final profit or loss result of the transaction.
To look at ourselves objectively, we need to recognize the fact that trading is not easy, and failures often outweigh successes. This does not depend on our level of effort or intelligence.
Therefore, the author believes that "successful traders are realists. They are well aware of their own abilities and limitations, have a keen understanding of market dynamics, and can calmly deal with various challenges."
3️⃣ Logical trading system
In addition to having a good mindset, you also need to establish a logical trading system.
What is a logical trading system?
The author suggests that a logical trading system should have three distinct characteristics: applicability, simplicity and low frequency.
First of all, a logical trading system must be consistent with personal trading habits to ensure that traders have a deep understanding of it, including various indicators, parameters and applicable scenarios of the system. Only by fully mastering them can traders use them freely and with ease in actual operations.
Secondly, the trading system should be simple and clear. Ideally, the number of indicators used should not be too many, preferably less than three, to ensure that the system can clearly send out trading signals and reduce complexity and difficulty of operation.
Finally, a logical trading system should also maintain a low trading frequency, because any transaction is a negative-sum game, and factors such as commissions, slippage, and spreads are its natural enemies.
Therefore, a logical trading system, characterized by its applicability, simplicity and low frequency, provides traders with an efficient and robust trading framework.
4️⃣Effective risk management plan
In terms of risk management, the author introduces the method he has used for many years - two rules and a triangle.
The two rules are the 2% rule and the 6% rule. These two rules are also the trading disciplines that the author sets for himself.
The 2% rule stipulates that the loss of each transaction cannot exceed 2% of the account balance; the 6% rule stipulates that the loss of each transaction cannot exceed 6% of the account balance each month.
A triangle, which the author calls the risk control iron triangle. The author requires that every transaction and the maximum number of transactions must be calculated through the iron triangle.
A. The maximum amount you risk on any trade you plan to take (never more than 2% of your account size).
B. The price difference between your expected entry level and stop loss level - the risk you take on each share.
C. Divide A by B to get the maximum number of shares you can trade. You don't have to trade that many shares, but you shouldn't exceed this number.
For example, if you have 50,000 U in your account, 2% of the account size is 1,000 U, which means that every time you open a position, the maximum loss cannot exceed 1,000 U. If there is a stock now, the price is 10 U, and your stop loss is set at 9 U.
This is actually the best way to implement risk control by using the maximum loss margin to reverse the number of open positions.
The above four points are the core content of the book and are also a summary of the author’s experience in trading over the years.
mutual encouragement!