Today let’s talk about the nine levels of trading in my mind.
The first level of trading I call it “sponge”.
The characteristic of this stage is the frantic absorption and learning of various theories, knowledge, and principles.
From Dow Theory to Gann Theory, from K-line charts to curve charts, from financial analysis to industrial theory, from macroeconomic theory to trading psychology. In short, everything related to trading was absorbed crazily.
This is the only way for everyone to grow in investment, and it is the process of laying the foundation.
The more solid this foundation is, the further we can go in the future. It is not difficult to absorb like a sponge, but it is difficult to separate the dross from the essence, to digest, and to integrate. However, many people unfortunately stay at the stage of absorption. They are proud of how much they know and are complacent about it.
At this stage, we are still a long way from making stable profits by using Monkey King’s somersault cloud.
The second level of trading I call “The Lost One”.
The characteristics of this stage are: Honey, I understand the principle, but why the hell am I not making any money?
The characteristics of the complex human physiological system determine that the process from understanding a certain principle to its execution is a long one.
This circuit may be disturbed and damaged by many things. It is like the Red Army's 25,000-mile Long March, where they had to climb snow-capped mountains and cross grasslands, endure cold and hunger, and deal with the enemy in various ways, risking their lives. The difficulty of this circuit from understanding the truth to implementing it is no less than the 25,000-mile Long March. Because on this road you will encounter an extremely powerful enemy, which is your emotions. For example, greed and fear.
The power of emotions is so great that it is 100 times more powerful than your rational power.
This is not the scariest thing.
The scariest thing is that this emotion is also a part of you.
No matter how powerful the external enemy is, it is not to be feared. But your emotions are not external enemies. They are of the same origin as you. They are a part of you. They are you. For example, when it is time to stop loss, you are reluctant to stop loss and hesitate to do it. This reluctant part is also a part of you. It is not an external enemy, but in your flesh and blood.
No matter how powerful a person is, can he defeat himself? That is why the ancients said that it is so difficult to achieve unity of knowledge and action.
Many people get lost in this long circuit for their entire lives.
The third level of trading I call “ruthlessness”.
Since emotions always interfere with us, let's make ourselves ruthless.
The opening line of the Book of the Golden Flower says that one castrates himself in order to practice magical skills. This is what it means.
When making decisions, try not to let emotions get involved.
For example, when stopping loss, practice being ruthless at the moment of making the move.
In fact, this stage has already entered the practice of "good protection of thoughts" as mentioned in the Diamond Sutra.
Only by focusing on the present and not being bothered by past trading successes or failures can you be "ruthless".
This stage is usually the beginning of profitability.
The fourth level of trading I call it “Three Good Students”.
The characteristic of this stage is discipline, especially discipline. The ruthless stage means that you still have emotions, but you try hard to force them out. But when you simply execute trading discipline, things become simpler.
You will develop a habit of making a trading plan for the next day every day. The next day, no matter what happens, you will execute according to this plan.
You are happy to follow discipline no matter what the cost.
For example, your trading plan yesterday stated that if the price of Bitcoin falls to $26,000, you will stop loss. As a result, the lowest price today dropped to $26,000, and you stopped loss as planned. Then the price rose all the way to $26,500.
From the perspective of the transaction results, today's operation was very bad. But from the perspective of the transaction process, your execution of the transaction plan was perfect.
At this stage, you begin to understand how to treat the transaction results and the transaction process separately. This is a very important step.
The correct trading process is 100 times more important than a single correct trading result.
Because the correct results of a few transactions are short-term, and have little impact on your investment career in the long run. The correctness of the trading process proves that you have developed good habits, which is the long-term and important thing that can accompany you for a lifetime.
In fact, the most terrible thing is that you get the right result by using the wrong process.
For example, in the previous example, the plan clearly stated a stop loss of $26,000, but after the price reached that point, you hesitated and did not execute it, and as a result, the price went up again.
On the surface, you have made a profit, but this is the most dangerous part, because you have been "rewarded" by violating the trading plan, so you will further violate the trading plan next time.
A thousand-mile dike is destroyed by an ant hole, and eventually your entire trading system will collapse.
The fifth level of trading I call “internalization.”
You don’t even have to write a trading plan every day (for 99.99% of people, it is still strongly recommended that you do so).
Because all the discipline and iron execution have been internalized. It is like a skilled driver who has internalized when to step on the accelerator and when to brake. A trading system has been formed in your heart, and you subconsciously execute transactions strictly according to this system.
At this point, you are actually already a quantitative trader, or a semi-quantitative trader.
Many experts in subjective trading are actually at this level.
The sixth level of trading I call “inaction is better than action.”
When your system is formed, you may find that you don't even need to watch the market. You can write your trading strategy into computer code and let the computer watch the market and execute orders for you. As a monitor, you only need to take a look occasionally.
At this stage, you will find that the less you do, the more you earn. This is because your inaction is the prerequisite for ensuring that the system works. Once you do too much and interfere too much with the system, it will have a negative effect.
At this stage, you need to control your desire to subjectively intervene in the system.
The seventh level of trading I call “mathematician”.
Coming here means that you have already mastered quantitative trading and have your own strategies, models and practices. As a quantitative trader, the first and most important step is to make a beautiful backtest capital curve.
When you have a strategy idea, you need to write it into computer code. Then what? Instead of starting to trade immediately, you should backtest it with real historical market data.
For example, you have a strategy that says buy when the 5-day moving average crosses the 20-day moving average, and sell when the 5-day moving average crosses the 20-day moving average. You write a computer code, and then you do a historical backtest on the daily data of the Shanghai Composite Index from 2010 to 2015 to see if this strategy can make money.
As a result, you find that the effect is not as good as you imagined. Then you will start to do something called parameter optimization. Since the effect of the 5-day moving average and the 20-day moving average is not good enough, how about changing to the 10-day moving average and the 30-day moving average?
You will find that there are many parameters to choose from. This is when the computer comes into play. It can help you complete a large number of calculations and find the optimal solution among a large number of parameters.
This process is called fitting in mathematics. In essence, it is to find the parameters that can best adapt to the historical market through a large number of calculations. Then you can get some beautiful simulated capital curves.
This process is a must for all quantitative traders and is also a very important stage.
Because the better you can fit the historical market, the more beautiful the capital curve you make, which means that your basic skills are very solid, that you have a very deep understanding of the market, and that you have the ability to optimize the combination of various technical indicators.
These abilities are invaluable.
The eighth level of trading I call “trying not to be a good tailor.”
In the previous stage of fitting, you may use a large number of filters, a large number of conditions, etc., to make the strategy perform well enough in the historical market. But suddenly one day you find a problem: the more parameters of the strategy are used, the worse the adaptability of this strategy to the future market may be.
It's like a tailor making clothes. Based on your current body shape, he carefully measures a lot of data, and then makes a very fitting piece of clothing, which makes you look very beautiful in it. But the problem is that the more fitting the clothes are at this moment, the less adaptable they are to your possible body shape changes in the future.
If you suddenly become fatter or thinner in the future, you won’t be able to wear this dress. The future of the foreign exchange market is uncertain, and each product is likely to become fatter or thinner one day in the future. If you make the dress too fit, it will be less adaptable to the future.
When you realize this, you enter a new phase that I call subtraction.
You would rather have the clothes not look so good at the moment, so that they can adapt to future changes.
This process is very painful.
Just imagine how painful it is for a good tailor to make clothes that don't fit well on his own initiative.
Similarly, if one of your strategies can produce a very beautiful capital curve with stable returns and small backtest in the historical market, then if you want to do subtraction, the capital curve may become bumpy and not so beautiful.
When you reach this level, you will understand the pain.
The ninth level of trading, I call it “the simplest way possible.”
“The great way is so simple that one only dislikes picking and choosing”, this sentence comes from the “Inscription of Faith” by Sengcan, the third patriarch of Zen Buddhism. I like this sentence very much.
After you have tried countless methods, pretended to be very sophisticated, and used countless Nobel equations, you finally find that the world is actually very simple.
Things that can remain effective over time are those that are plain and simple.
Please slowly experience this. Let's review the nine levels of trading. You will definitely feel that the road to trading is really not easy. It's like thousands of troops crossing a single-plank bridge. Some trading masters finally came out after experiencing several bankruptcies and ups and downs in life, and finally achieved enlightenment.
