The essence of trading is quite simple: it is the exchange of goods for goods, a fair trade. When you buy something, you have to exchange money for it; if you want to make money, you have to exchange time and effort for it. Almost everything in this world is based on the principle of exchanging one thing for another.
By the same token, when we trade and want to make a profit, we must also exchange something for it, which is to bear the risk behind the profit. We dare to dream of making several times the profit, and we must also accept the risk of losing several times as much; it's all equivalent.
Today, I'm not just talking about this simple logic of exchanging goods for goods; I also want to extend some trading perspectives that I believe will inspire you.
1. Since the essence of trading is exchange, we also have to wait for a profitable time to exchange. The timing of the exchange is crucial; it's not just about exchanging at any time, but also about the method and approach. Being able to find a better time to exchange can also make it easier to make a profit.
For example, technical traders need to find high-probability technical patterns, such as breakouts at tops and bottoms, indicator divergences, and continuation patterns, etc. These entry points will have a higher success rate than just blindly entering the market.
Fundamental traders look for times when the supply and demand relationship is unreasonable. For instance, Fu Haiyang made a 6 million yuan profit from trading garlic because he noticed that the garlic price was unreasonable, extremely low, and even below the cost of storage. Farmers would rather throw away the garlic to feed pigs than store and sell it. So, this supply and demand relationship is flawed, and such low prices cannot continue to be sustained. This is a trading opportunity.
Or economic policies, exchange rates, and monetary policy changes that are unreasonable or fluctuating can also create opportunities for profit, just like Soros's defeat of the Bank of England, the unreasonable high exchange rate during the UK's economic downturn, and so on.
2. Identifying trading opportunities is just the first step; you also have to be able to seize them.Identifying trading opportunities can only be said to demonstrate our vision and sense of smell, but to truly make money, it still depends on implementation and specific trading strategies. For instance, technical traders determine entry points for a continuation pattern, the space for stop-losses, profit target levels, and more complexly, they establish criteria for adding or reducing positions; all of these are part of a trading strategy.
Fundamental traders do the same, choosing points of entry for opportunities and determining exit strategies. There are also some fundamental traders who, after identifying opportunities, use technical analysis methods for opening positions, setting stop-losses, and closing positions, combining fundamental and technical analysis. This approach is also excellent (if one cannot delve deeply into both, mastering one can also lead to profits).
3. Risk contingency plans are indispensable. The common issue everyone faces is the constant thought of how to make money, never considering what would happen if they fail, which is quite terrifying. When failure truly occurs, it feels like a disaster, akin to being doused with a bucket of cold water and the sense of defeat that comes with it.
Market trends have uncertainties. For example, technical patterns on candlestick charts can be deceptive, with fake breakouts and false signals. A well-structured consolidation pattern may break out but not follow through with a trend, instead moving significantly in the opposite direction.
Unexpected geopolitical events can also change market trends, as can economic policies, exchange rate policies, and so on. For instance, the recent sudden interest rate hike by the Bank of Japan caused the USD/JPY rate to plummet from 153 to 141, completely altering the daily bullish trend of the US dollar against the Japanese yen since January 2024.
Therefore, our trading strategies must include risk control plans to address and manage the uncertainties in trading. Strict stop-losses on every order are the most basic risk control measures. Having stop-losses is the beginning of mature trading.
4. The essence of trading also includes human elements.Although the essence of trading is exchange, this process of exchange is manipulated by us humans. Since human beings are involved, there must also be the involvement of human nature.
The human heart is inscrutable, and market sentiments are all over the place. The psychological changes and instability of people in trading are the biggest variable in trading. Therefore, many so-called market makers or large capital will use this weakness of human nature to "mow the lawn" (i.e., take advantage of inexperienced traders).
For example, in terms of human greed, market makers use this emotion to push up the price and sell. They buy a large amount at a low price, use various means to raise the price, and when everyone sees the opportunity to make money, they rush in. Once the price rises to a certain level, the market makers start to sell gradually, causing the price to fall, and we retail investors end up holding the bag. Here, the market makers make full use of our human weaknesses.
Another example is human fear. Market makers use this emotion to suppress the price and accumulate shares. When they see potential stocks, they create a climate of fear by suppressing the stock price. When everyone gets scared, they rush to sell their stocks at a low price, which makes it easier for the market makers to accumulate shares, and then they raise the stock price and sell.
So, no matter what emotions we have in trading, we must calm down and view the market rationally, because there are always people using our emotions to make things happen. Only by calming down can we see the whole picture of the trend, stand with the trend, and catch a wave, instead of being slaves to emotions and being led by them.
Therefore, the essence of trading losses is the loss of control over one's mentality, being carried away by emotions.
I will share these points today. Understanding these few things can help you avoid most of the pitfalls in trading. Those who understand will know.
