When it comes to trading systems, many people might find it very complex, especially for beginners in trading. The mere sight of the four characters "trading system" can make one's head ache. Moreover, whether it's in books or online, there is an overwhelming amount of knowledge about trading systems, so much so that it's sometimes hard to know how to organize and filter the information effectively.
I have also gone through such a phase, and it was only after a long period of learning, organizing, and filtering that I finally sorted out the logic and established my own trading system.
Today, I will help everyone to clarify their thoughts, explain the technical logic and profit logic of trading systems. Understanding these two points may make it clearer when looking at the knowledge available in the market.
1. The technical logic of trading systems.
The technical logic is about determining which kind of market situation you want to trade in and then implementing it with technical standards.
We can divide technical strategies into two types: trend strategies and reversal strategies.
Trend strategy: This is what we refer to as trading in the direction of the trend. Based on technical standards, once the market has a direction, you trade in line with that direction. It is mainly divided into two categories: trend-following trading that tracks the trend to the end, and swing trading that tracks segments to capture profits.
Reversal strategy: This involves identifying the turning points of a trend, entering the market at these points, and trading the market after the reversal.
Let me give an example to make it clearer.
In our trend strategy, we use trend lines for trading. Before the market breaks through the trend line, it has already moved in the opposite direction for a while, and we enter the market after the trend line.In our reversal strategy, we trade using support and resistance levels. After the market tests these levels, we look for opportunities to trade reversals or rebounds.
The chart is a 5-minute candlestick chart of gold.
The market tested the support level of 2311 for the second time, which is the entry point for the reversal strategy. After entering, the market began to reverse.
After the right side of the market broke above the trend line, it confirmed the trend to be bullish. At this point, we look for entry points for trend strategies in the pullback.
It can be clearly seen that within a certain market movement, the entry point for the reversal strategy is earlier than that for the trend strategy.
Once you have established the technical logic you want to follow, you can build a trading system to complete this technical logic using familiar technical indicators.
2. After establishing our technical logic, we need to establish the logic for profit.
There are three factors that determine trading profits: trading frequency, success rate, and risk-reward ratio.
The success rate and risk-reward ratio of the trading system are the most critical, as these two factors determine whether the trading system can be profitable. A high success rate combined with a low risk-reward ratio can be profitable, as can a low success rate combined with a high risk-reward ratio, but it is not possible to achieve both high success rates and high risk-reward ratios.
We must choose one of the two, and the remaining trading frequency determines the amount of profit our trading system can make.Trend strategies and reversal strategies can both technically achieve the logic of profitable trading.
The most commonly used logic for profitable trading is to make big profits and small losses, with a high profit-to-loss ratio, such as a 2:1 ratio, or 3:1, or even higher.
Why is this logic widely used?
Because the logic of a high profit-to-loss ratio can reduce the pressure in trading. The potential profit from each trade is greater than the loss, which makes us more at ease in trading. Deep down, we feel that this will be a cost-effective deal.
To summarize is quite simple:
First, we need to know whether we want to trade in trends or reversals, and choose one.
Then we decide what kind of profit method we want to adopt, whether we want a high profit-to-loss ratio or a high success rate, and then determine our profit-to-loss ratio range.
After determining these factors, use familiar technical indicators to form a trading system, and conduct a large number of tests in backtesting software or a demo account to optimize the practicality and profitability of your trading system.
There is nothing else, do not think too complicated about the trading system, it is all some more detailed operations, testing one's patience.
It is the same as doing business, it is a comparison of who has more patience to grind technology, who can endure more, who pays more attention to details, and who has a better mentality. In the end, it is found that there is no so-called technical barrier, they are all products accumulated over time.
