When most people attribute their trading failures to their mentality, have they considered whether their basic skills have really passed the test? In the past, you may have thought that as long as you solve the four bottleneck problems that hinder your trading development, such as small capital, asymmetric information, unqualified technology, and unreliable mentality, you will be able to go smoothly, but sorry, this article will overturn all your ideas. . We believe that there is a successful logic behind every successful transaction. We will discuss three questions in this article:
1- Certainty ≠ High Probability
2- Is it okay to not set a stop loss?
3- High win rate underperforms high profit
——The battle between certainty and high probability——
First of all, we need to be clear, is there any certainty in the transaction?
The so-called certainty refers to a certain form, or when several conditions are met, the price will definitely rise or fall, or the rate of rise or fall can be determined.
If you find it, you can gain unimaginable wealth and income with this certainty.
If you cannot find this certainty, the way to achieve profitability is to use probability.
Because there is no deterministic form, because the form is always not so standard, because there will be thousands of people and thousands of waves, it is difficult to judge, so if this is the case, the result of each transaction is uncertain, how can we make a profit? ? The most reasonable way is to work on probability. But beware: even the highest probability is not certainty.
——Give an example of playing cards——
1 deck of poker, 54 cards,
According to the rules, you lose if you draw the king, and you win if you draw the others. Then your probability of winning is 53/54, which is very high.
Well, suppose you have a bet of 100 yuan. If you win, the other party pays you 10 times the bet (ie 1000 yuan). If you lose, you lose all your bet (ie 100 yuan).
A transaction with a wind-report ratio of 10 times. When you are sure that everything is in your favor, then you bet all 100 yuan this time. As for the ending, you may just memorize it like that, losing penniless, all at once.
So certainty is certainty, and high probability is high probability. Many people think that there is an equal sign between them. The fact is that the two methods are completely different.
Because in the case of certainty, you will think that all the fund management strategies, stop loss strategies, overweight strategies, etc. are just clouds. But as long as there is uncertainty, even if it is a small probability uncertainty, you need to develop relevant strategies.
The left tail risk we often say refers to the risk that the probability of occurrence is very small, but once it occurs, it will cause extremely serious losses. But the fluke mentality and winning streak mentality will make you ignore the possibility of him happening. For example, in the above game, you have to consider only taking out a part of the total principal as a bet each time, instead of betting all at once. You will have more trading opportunities to increase your probability. If you can't agree with this, then everything we talk about next will lose its foundation. You don't need to read the following content.
——Isn’t it okay to not set a stop loss? The prototype of stop loss——
Many people don't understand why stop loss is so important, I just don't set a stop loss, can't it work? You do not need to set a stop loss, but if you do not set a stop loss in the trading system, you will not be able to determine the initial loss, and you will not be able to determine the risk-reward ratio, and everything about the trading system will be impossible.
Therefore, taking stop loss as the basis of trading does not mean that you must do what you want to do, but that if you don't do it, you will not be able to proceed later.
Everything in the transaction follows a logic step by step. But unfortunately, people who have been trading for many years are still not aware of this problem.
If everyone agrees that the way to achieve profit is to use probability, then two elements are critical: winning rate and single profit
The first is the winning rate;
The second is the degree of profitability of a single transaction;
Then on this basis, the concept of reward-risk ratio emerged.
Scenario 1: You have won more times and it is easier to make a profit, but because you cannot find a sure way to win, you should try to win as much as possible every time you win.
Scenario 2: Even if the number of times you win is greater than the number of times you lose, but you win small profits and lose big profits. The so-called loss is big, and you may not be profitable in the end.
Some people say, I can't control so much, as long as I win every time I buy it.
Okay, then you may not be able to turn over due to a certain loss. I believe that there are quite a few people who have had this kind of experience, that is, the accumulation of multiple profits is not enough to make up for a loss, so you will see some old stock investors learn to run fast, and when the opportunity is not good, they will pay out even if they lose. This is the prototype of stop loss.
Of course, this stop loss is the original stop loss, which is not established in the framework of the trading system, and it is only based on years of trading experience.
Gradually, you will find that it is much better to set a stop loss position before each transaction than to be forced to liquidate your position if something goes wrong.
Only after setting the stop loss position can it be easier to judge the quality of a transaction. So when you realize that, you revisit every transaction.
Let's look at an example: you earn 8% without setting a stop loss position, you may feel very content, right? But when you understand that you risked 20% of your 8% profit, your perspective may change. Looking back at previous historical transactions, you will find that too many of your transactions are unreliable, then you have made progress.
——Finally, let us reorganize——
A profitable trade is not necessarily a good trade. My client will often tell me that he has made money again, but I only care about "Is the money you make what you should make?" Is it in line with your logic of making money? If it matches, OK! Then you may continue to make money.
Then look at these ordinary traders who are frantically pouring into the market, day trading who follow the market up and down every day, traders who grab caps, they may think that this is gambling, but have you ever studied the logic of casinos to make money?
We believe that there are always uncertainties in the market, so we need to regulate our own fund management, set up and plan bets. We need to leave room for our mistakes and the opportunity to participate in the transaction again, so we will set a stop loss. Under the premise of controlling risks, we try to obtain higher profits as much as possible, so you will see that many strategists will use the strategy of increasing profits and opening positions with floating profits. Many short-term winners use the exact opposite Martingale strategy. Sometimes we can only say that there is no right or wrong here, only logic.
When you analyze the problem under the framework of a logical trading system, it is not so difficult to choose when you look at many specific problems. At this time, do you still think that it is your trading mentality that leads to the unsuccessful transaction? What does a good attitude rely on to support development?
Up to now, I believe that if you start from the uncertainty of the nature of the transaction and extend it step by step, you will gradually establish your own fund management strategy, stop loss strategy, overweight strategy, take profit and exit strategy, etc., then The rest is to optimize your investment portfolio and strategy combination within this logical framework, and choose the best combination that suits your winning rate and return-to-risk ratio, which is the direction you should work on.
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