Meticulous; I never believed that trading could be as carefree as art. In fact, I think that excellent art also has a carefree exterior with a meticulous core. It's like calligraphy: the beauty comes from the balanced randomness, where 'randomness' is something elevated and 'balance' derives from the fundamental skills in regular script. No one can create beautiful cursive script without practicing regular script first, right? The same principle applies to trading. The experts who have achieved great results often credit their success to a sense of the market. But what is this market sense? It is the result of a meticulous logical framework refined through countless trials, allowing traders to make instantaneous decisions. Therefore, a meticulous logical framework is foundational, and the results of an arbitrary market sense are predictable.
I am a slow reactor, requiring a period to formulate a trading action. From forming a general expectation based on the large structure to gradually validating the smaller structures, I also observe transactions, positions, and the cooperation of related sector varieties. Only when the trend falls step by step into a meticulous logical framework does trading occur. This may cause me to miss some opportunities, but using meticulous logic to pursue high probability means avoiding many risks, allowing me to take heavy positions. In my view, daring to go big when good opportunities present themselves is one of the differences between an average trader and an excellent trader. Therefore, I often remind myself with this sentence: "Those who can retract well in the face of uncertainty can capture accurately in front of good opportunities."
How do we bring meticulousness into execution once we understand the principle? Buffett has a saying called the "hole punch theory," which posits that an investor only has 20 opportunities to strike in a lifetime. Each buy or sell decision punches a hole, and once 20 holes are used up, it forces strict stock selection and reduced operations. This method is very effective. When novices train for day trading, they are only allowed to use a fixed number of rounds each day. Over time, this forms a habit such that even when they are given more freedom, they can still maintain a good win rate and profit ratio. For meticulous control, I often use self-questioning. Before each trade, I ask myself several questions:
1. Am I following the trend?
2. Has the large and small structure formed?
3. Are the range and expected size determined?
4. What are the variables?
5. Are the conditions or stop-loss positions clearly defined? If I can answer these questions clearly, I can approach the trade with confidence and ease. Most inexplicable losses come from spontaneous trades.
Following the trend
Mencius said: "Even with wisdom, it's better to follow the trend." The power of trends is immense. Once a trend forms, it crushes opposing forces, and these forces in turn propel the trend further. A trend in one asset often strengthens related assets, moving forward in a spiral.
Currently, the speculative atmosphere in domestic markets is strong, often leading to overcorrection when mispricing occurs. I previously summarized a passage, which I'll use in full:
The essence of profit comes from market inefficiency, manifesting in the following aspects:
1. Information asymmetry, such as the possession of scarce resources, insider information, control of public opinion, or the ability to exploit rule loopholes;
2. Continuity and self-reinforcement of trends. When mispricing occurs, early funds will correct it, smart money will follow quickly, and trend-following funds will strengthen the trend. When the trend self-reinforces, blind funds will rush in regardless of cost, ultimately defeating reasonable opinions and leading to madness, which then collapses;
3. Excessive distorted reinforcement;
4. Continuity of volatility patterns.
Human cognition is often biased, and scientific development is a process of continuous falsification. Even Newton eventually turned to theology. Therefore, this market always has inefficiencies, giving us hope to exit with profits, though the process is arduous. These inefficiencies can be called market gaps, continually repaired through market evolution, leaving smaller, more hidden gaps. Thus, profitable methods must continually evolve, or move to less efficient markets.
Any method or system will eventually be falsified. Our task is to earn enough profit before that happens, preserve profit during falsification, then evolve the system, switch markets, or exit. Regardless of evolution, any system achieving stable profits must rigorously control risk; survival is key to advancement. Emphasizing trend-following is because markets can never be completely efficient, and following trends offers a probabilistic advantage, though the advantage has a shelf life.
Trends can be rising, falling, or sideways. Once any state forms, don’t expect it to change immediately. Following the current trend is naturally a high-probability behavior. If trends across different cycles are consistent, resonance often occurs, akin to wave superposition in physics. However, most of the time, trends across different cycles conflict. What should we do then? Which cycle should we look at? My understanding is: the most important trend should be the one in the cycle larger than our trading cycle because it offers the most immediate protection for our trades.
I categorize a typical trend into establishment, consolidation, and reestablishment. A pure, voluminous rise or fall is trend establishment, limited retracement with matching volume shrinkage is consolidation, and reappearing significant volume and distinctive K-line combinations at key time structures indicate reestablishment. This market has many profitable methods, but the safer method for most people is still trend-following because most do not have genius-level reactions and extraordinary execution. Following the trend gives traders more time to respond to unfavorable situations.
Recognizing, following, and using trends. Many times, our profits are not due to our brilliance, but because the trend came and we caught it.
Sharpness
No matter how confident we are, we cannot achieve 100% certainty. After opening a position, we must carefully verify the expected development. If it meets expectations, we should watch for adverse factors; if it falls short, we must identify adverse factors. If it falls short without adverse factors, handle it according to "Phantom Rule #2": if the market has not proven the position right within a timeframe, handle the position. Do not wait for the market to prove the position wrong. This subtle difference can lead to vastly different outcomes, a concept that resonates with many.
We are traders, not analysts. "Handling" is more important than "predicting." For long-term trades, pre-trade logic might dominate due to lighter positions and ample time, making the handling less urgent. Conversely, the shorter the trading cycle, the more important handling becomes. In short-term trading, a portion of the profit comes from resolute handlers taking money from procrastinators.
Stop-loss
Regarding stop-loss, I previously wrote an article titled "Admitting Losses is the First Step to Steady Profit," emphasizing the following points:
1. Losses are inevitable; they can only be limited and calmly accepted as the cost of profit. We need not belittle ourselves when losses occur, just as we should not get overly excited when we profit. This is simply the probability advantage at work.
2. Determine stop-loss conditions or positions before entering the market, and be prepared for losses. When the actual direction is unfavorable, constantly remind yourself of the plan - for instance, repeatedly telling yourself to close the position without regard to cost when a certain price is breached. Those prepared psychologically are more decisive than those who act on a whim.
3. Stop-loss should not focus solely on a single trade. Hourly, half-day, daily, or periodic drawdowns should all be controlled through the "three reductions" method.
Livermore said: "Whenever I lose patience and trade prematurely without waiting for the critical moment, I lose money," highlighting the importance of patience and meticulousness. Trading is a continuous action; most people focus excessively on the beginning direction and entry, neglecting the keen handling of positions, exits, and post-trade adjustments. Lacking follow-through, many trades end up in failure. What should we do? Meticulous pre-trade preparation, sharp in-trade handling, and thorough post-trade adjustments are indispensable. Post-trade adjustments are often most overlooked yet have the deepest impact. My adjustment methods include the "three reductions," plus earnestly writing eight words in my trading journal: "Meticulous, Follow the Trend, Sharp, Stop-loss."
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