#Trading System#PositionManagement #Loss-Based Positioning

Position determination based on loss means that the position size of each transaction is calculated based on the maximum possible loss. In other words, the maximum possible loss is determined before the transaction, and then the loss is used to decide the size of the position.

In my trading system, I think minimizing risk is more important than maximizing profit. After all, the premise of maintaining long-term net profit is that the principal cannot have too much drawdown. On this basis, I will continue to improve the winning rate and profit-loss ratio to achieve the goal of maximizing profit.

Assuming my total principal is 10,000 yuan, I set myself a maximum loss limit of 10% or 1,000 yuan for a single quarter, then I can divide this 1,000 yuan into 10 parts, each of which is 100 yuan, which is my maximum single loss limit. From a psychological point of view, a single loss of 1% to 2% of the total principal can maintain a better trading mentality.

After determining the maximum loss amount for a single order, and then determining the entry point and stop loss point of the selected target, you can calculate the stop loss ratio (after the entry point is determined, you can also estimate the profit and loss ratio. Generally, the profit and loss ratio must be greater than 1.5 before considering opening an order).

Position size = maximum single loss amount/stop loss ratio.

For example, the maximum loss of a single order is 100 yuan, and the stop loss ratio is 5%, 100/0.05=2,000 yuan, which is the position of this order. Under the premise of 10,000 yuan of principal, this position is equivalent to 20% of the position.

If this order eventually makes money, add half of the profit to the maximum loss amount for a single quarter. This can not only achieve the purpose of snowballing, but also lock in part of the profits.

Then every next quarter, all funds will be rebalanced and recalculated.

If you use the loss-fixing method to trade, you will find the following benefits:

The first benefit is that your loss ratio is determined in advance, so if you want to improve profitability, you can only try to reduce the stop loss ratio when opening an order, that is, try to increase the profit and loss ratio. Enter the market at a more appropriate point instead of opening a position blindly.

Because if the stop loss ratio is too large, the position will inevitably be relatively light, so the risk-return ratio is not very cost-effective. This is equivalent to your trading system urging you to continuously optimize the entry point. If the position is not suitable, it is better not to enter than to blindly take action.

The second benefit is that the risk resistance is the same for assets with different volatility. For example, if my maximum single loss is the same for an altcoin with high volatility and the S&P 500 index with relatively low volatility, then the position opening of the asset with low volatility will inevitably be larger, and the position opening of the asset with high volatility will be relatively smaller.

This is also applicable to contract trading, as long as the leverage is also included in the formula. Assuming that the maximum loss of a single transaction is still 100 yuan, the leverage is 2 times, and the stop loss ratio is 5%, then the position = maximum loss of a single transaction/multiplier/stop loss ratio = 100/2/0.05 = 1,000 yuan. You will find that the higher the leverage, the smaller the position. Yes, I never open a high leverage because I will first think about trading from the perspective of maximum loss.

Let's talk about the practical points of loss-based positioning:

First, it is necessary to shift the focus of trading to improving the winning rate and profit and loss ratio, rather than blindly pursuing a single large position and a low stop loss rate.

Assuming the stop loss ratio is only 2%, but the winning rate is only 1/10, that is, 9 out of 10 openings are stopped, then although the loss ratio is fixed, the total loss is still large. It is like betting on that one profit to have a super high profit-loss ratio. Moreover, this method will cause frequent stop losses, which will also have a greater impact on trading psychology.

Second, what should you do if you suffer multiple consecutive losses in a single quarter? One way is to actively reduce your trading frequency and review the reasons for the low winning rate of past transactions; another way is to divide the remaining loss amount into smaller parts and reduce the maximum loss amount of a single transaction, so that you can have more trading opportunities (but the corresponding positions will also be reduced).

Third, if the maximum loss limit for a single quarter is used up, what should I do? My suggestion is to temporarily leave the market, concentrate on improving your inner strength, improving your cognition and trading system, reviewing the market, reading books, or going out to relax and change your mood. Wait until the next quarter to enter the market. Sometimes choosing not to trade is much better than trading.

Fourth, the above maximum loss in a single quarter, whether this cycle is a single quarter, a single month, or half a year, is determined by each person's trading habits. In short, the larger the time period, the greater the maximum loss ratio can be, and vice versa.

All of the above parameters can be adjusted flexibly. The key is to find the parameters that suit your trading habits and trading rhythm, and then implement them resolutely.

Finally, let me quote a story about black market boxing champion Tang Long:

There is a legendary Chinese who was all the rage in the black market boxing ring in the United States. He is ‘Tang Long’. His real name is Frank Chen, his Chinese name is Chen Jinsheng, and he was born in Hsinchu, Taiwan. Although he likes to call himself “Tang Long”, boxers call him “Shark” because Tang Long is extremely fierce in the boxing ring and often kills his opponents within a few rounds. Tang Long has been very successful in his fighting career. His record is 96 wins in 97 fights, and he killed his opponents 95 times.

It stands to reason that 96 wins out of 97 games is a pretty good result, with a winning rate of nearly 99%. What was Tang Long's ending? After winning 96 games in a row, he suffered a fatal defeat in a battle with Christie Paulie, known as the "Bulldozer". This defeat made Tang Long fall on the boxing ring forever and he had no ability to stand up again.

Tang Long's winning rate was quite high, but his only failure cost him his life.

Therefore, the core concept of my loss-based positioning is: do not pursue aggressive trading with large positions, but choose long-term transactions with controllable risks to gradually increase the net worth.