Differences between contract and spot trading, and the importance of position management.
2. Commonly used and relatively effective technical indicators in trading.
3. Reasons why technical analysis fails.
1. How to manage position and mindset.
Perhaps many people feel they already have rich trading experience, so why should they still learn position management?
First, let's use a simple mathematical method to explain why contract trading is more difficult to profit from. Establish an equation that is effective in any market: win rate × (average profit) - (100% - win rate) × (average stop loss) = profit. This leads to two critical concepts in trading: win rate and win-loss ratio (the ratio of your average profit to your average loss per trade).
Typically in our spot investments (whether in the stock market or cryptocurrency), correct judgment leads to a rise and profit, which is also a simple algorithm for stock trading. Therefore, as long as the win-loss ratio is 1:1 (your losses and profits are about the same for each trade), if the win rate is greater than 50%, you can easily make a profit. If my stock (spot) trading cycle is 7 days and the win-loss ratio is 2:1 with a win rate of 70%, then my expected return for each trade is (70%×2%) - (30%×1%) = 1.1%. Since there are 52 weeks in a year, the annualized return rate can reach 76%. As long as you judge the outcome correctly in spot trading, you can profit.
In contract trading, however, you need to judge three things: results, previous fluctuations, and timing.
1. Similar to stocks, is your directional prediction correct?
2. Determines whether your position is to stop loss or liquidate.
3. Contracts differ from spot trading in that they have delivery, and even if OK has quarterly contracts, there's only a 3-6 month delivery period.
Therefore, based on 1, 2, and 3, we start with the premise that our accuracy in judging a thing is 70%.
Now our profit is 1 × 2 × 3 × win-loss ratio = profit. This means that compared to a 70% win rate in spot trading, our final win rate will drop to 0.7 cubed, which is about 35%. Even if our win-loss ratio remains 2:1 at this point, 35% × 2% - (100% - 35%) × 1% = 0.05%, which is not profitable.
As mentioned earlier, your profit is the win rate × win-loss ratio. So as long as you have the possibility of a liquidation, if you continue to trade, even if your win rate is 99%, your win-loss ratio will become 0 due to 'liquidation,' meaning no matter how you trade, it will return to zero.
Big players in OKEx contracts, such as Fei Zhai and Ban Mu Xia, also cannot escape this rule.
Therefore, the most important aspect of contracts is position management.
Specific methods for position management and personal mindset analysis. Everyone is different, and strictly managing position size is very difficult. For 80% of people, I think it's challenging, so I have provided two paths to take (I belong to the category that finds perfect position management very difficult).
Overconfidence inevitably leads to mistakes. I might do 100 to 200 trades in a day, and I will always become inflated, so I chose the second path.
But regardless of the trading strategy, the cycle of planning → execution → profit or loss → planning → execution → profit or loss is inevitable.
Changes in mindset can lead to distorted operations and irrational planning.
The mindset after a loss will change, leading to distorted execution of operations and greater losses. This leads to mindsets such as 'quickly make back my losses' and 'get rich overnight.' The methods described below can help us use mathematical approaches to avoid psychological problems. (After all, we are not psychologists...)