In the world of trading, it is quite normal to encounter both bullish and bearish traps, and we will all experience them. The discomfort we feel towards these traps stems from the fact that we have started trading, and our accounts are subject to gains and losses. These traps directly affect our personal interests, which is why we detest them so much and have a strong affection for genuine breakouts. However, such emotions are particularly undesirable as they can significantly impact our objective judgment of the market trends.
Let's consider this: Can our real world be devoid of lies? Or have you never told a lie? Bullish and bearish traps are akin to lies in the real world; they have an inevitable existence and cannot be eliminated. When we ask someone why they lie, the reasons are always varied and diverse. This is similar to the reasons behind bullish and bearish traps in the trading world; there are always countless justifications, and it is impossible to pursue them all. The rationale for the existence of these traps should not be the focus of our attention.
Let's think from a different perspective: if all bullish breakouts were not traps but genuine breakouts, then we could profit from every trade, and everyone would be able to grasp this pattern. When the rules of the trading world are completely fixed, everyone would make money, and no one would lose. If everyone were to go long and no one were to go short, then there would be no trades for long positions to be executed, and the trading world would cease to exist.
Therefore, just like the day and night in our real world, bullish and bearish traps are inevitably present and unchangeable. We just need to acknowledge this fact and do not need to investigate the reasons for their existence.
So, if there are fake breakouts in the market, how can we profit?
The market cannot always be filled with traps; there will also be genuine breakouts. All we need to do is to seize these genuine breakouts to achieve profits. How should we proceed?
1: Choose a trading pattern or a breakout formation, such as a triangle consolidation breakout.
2: Establish a standard for trading this pattern, for example, requiring more than 40 candles for a triangle consolidation pattern, entering a trade on a breakout, setting a stop loss at the low point, and setting a 3:1 risk-reward ratio, etc.
The chart shows the 30-minute candlestick chart of the A50 index. After the market started to decline from 12585, it entered a horizontal consolidation in a triangular structure. Once the number of consolidating candles exceeded 40, the triangle was marked on the chart. After the market broke down, we entered a short position, set a stop loss at the high point above, and established a 3:1 risk-reward ratio.
3: Review historical data according to this standard, and calculate how many of these triangle consolidations were traps and how many were genuine breakouts in the past? Can a 3:1 risk-reward ratio make money? Can a 4:1 risk-reward ratio earn more? Use the risk-reward ratio to compensate for the losses from traps.Even if fake breakouts account for 70% and real breakouts only 30%, with a 3:1 profit-to-loss ratio, there is still an overall 20% profit advantage. Therefore, even with false signals, it is possible to make money.
4: After confirming that the standards are effective through backtesting, start with paper trading. Once successful with paper trading, proceed with small capital live trading. When the mindset has adapted to the fluctuations of small capital, gradually increase the position size.
This is similar to how many friends study technical indicators, getting very caught up in how the indicator is calculated and insisting on understanding its logical formula. However, once they figure it out, they find themselves even more confused. This is because our need is to know how to use an indicator to achieve profits, not to trace the production process of the indicator; the direction is skewed.
When we use computers for work, we don't get caught up in how the computer was invented, how many parts it uses, what the entire computation process is, why it can access the internet, or what its logic is. We don't usually think about these questions; we only think about how to use the computer to improve our productivity, which is the same principle.
Since we know that false signals are inevitably present, what we need to do is coexist peacefully with them. We should set technical standards to deal with false signals and psychologically accept the possibility of them. We should not let false signals disrupt our emotions, affect our mindset, and maintain rationality, integrating knowledge and action to achieve profits. This is what we should be doing.
