A friend who has been trading for 10 years shared his insights with us. What he said was similar to what I had learned before, but it made me shiver and brought about a fundamental change in my thoughts and perspectives. His trading strategy is very simple, but it is actually very difficult for most people. The greatest truths are the simplest, but understanding and practicing this principle is not easy.
Ahai communicated with multiple traders and summarized their experiences: hoping to help everyone.
1. My most important task is not to analyze the fundamentals, because so-called fundamental information is secondary and accessible to everyone, thus its value is limited.
My primary job is to manage funds and control risks because the primary goal is to ensure the safety of the principal. With high leverage comes high risk. Secondly, I study market trends (simply put, things like K-line and trading volumes) because the market is always right (this is also frequently mentioned by Livermore). News, policies, and fundamentals will all be reflected in market trends (remember the recent event when favorable news and policies came out? If you rushed into the market based on that, you would have failed because the trend was the opposite).
2. I stay out of the market for more than 80% of the year.
3. I never fully invest my capital (this differs from stocks because forex is riskier). Many winners of simulated trading competitions end up badly after 10 years. I can never be a champion because my positions rarely exceed 30%. Champions of simulated competitions gain from full-scale operations, but this excitement leads them into a trap of pursuing high returns. I had a client a few years ago who made billions in futures but lost it all due to a single impulsive act, almost jumping off a building. He could have had over 10 million left if he closed his positions in time, ensuring a worry-free life, but he couldn’t stay calm and kept adding margin until it was all gone. The contrast between billions and 10 million was too great.
4. My annual compound return target is 30%-100%. Usually, after achieving 70% in the second half of the year, I go on vacation because trading more increases the chance of making mistakes.
5. There are three types of trends: upward, downward, and oscillating. I only trade downward trends, which I excel at. Upward trends require many factors and a long time, whereas downward trends often happen quickly without much reason.
c. Using the same logic, after a rebound on July 9th, an upward wave formed. From last Friday, a new decline started, but they did not enter the market last Friday due to the high uncertainty there. Although the result now shows a significant drop, the market could have taken a different route. We connect the low points on the 9th and the 28th to form a straight line. If the K-line breaks this line (the line’s corresponding point is 3,600 points) in the coming period, then it becomes an entry opportunity. This may seem like missing out on a significant profit, but in reality, this friend has consistently achieved an annual compound growth rate of 30%-100% for 10 years without ever incurring a loss in any year.
a. Common top patterns in K-lines are double tops and head-and-shoulders tops. The Shanghai Composite Index doesn’t quite fit these patterns due to the drastic fall caused by the stock market crash. However, it is somewhat like a head-and-shoulders top. Connecting the low points of both shoulders forms a straight line. When the K-line breaks below this line (closing below the line for two consecutive days or closing more than 3 points below the line), that is the entry point. As shown in the circled area above, this is where the trend is confirmed and a relatively certain entry point.
b. The blue area in the chart represents the holding period. Notice that there is more room for the downward movement below the blue area, but they have already closed their positions. This is when the decline is most severe and the easiest time to close positions. The holding period does not exceed two weeks.
Reflexivity Theory This friend also explained the Reflexivity Theory, stating that it is simple yet fundamental, representing the basic logic of the stock market.
Gen Shu often criticizes Buffett. I believe Gen Shu’s views would change if he managed billions of funds. As my friend who trades futures mentioned, his top concern is the safety of each position, followed by how much profit he makes. Buffett admits he doesn’t understand high-tech, so he avoids investing in those companies, missing their high growth periods. Putting aside Buffett's reluctance to adapt or learn new things, his choice of investing in understandable industries and companies is undeniably prudent. His logic for buying Coca-Cola was impressive. Soros has a bad reputation because he mainly shorts stocks. Opposite to Buffett, Soros enters the market to sell when stocks are overvalued. While rising prices require numerous factors, a decline necessitates just one - severe overvaluation. Hence, Soros’s notoriety is understandable; when he enters the market to sell, it's the path of least resistance, allowing him to make quick profits. In a few months, he can achieve what might take Buffett years. Overvaluation and undervaluation are dynamic concepts. For instance, in a mid-bull market, most stocks are overvalued in absolute terms, but given the continued enthusiasm and inflow of funds, they become undervalued in relative terms.
1. If one day, with a relaxed mindset (unafraid of missing opportunities), using the simplest method (only trading on trend-confirmed opportunities), I can easily make money (not the most but steadily), I will consider myself successful. I already feel a paradigm shift in my attitude, and the next step is to validate this change in practice.
2. Set profit targets at reasonable levels to ensure high certainty of gains after entering the market. If unsure, don’t enter.
3. Do not base decisions on any information or news, but only on market trends (leaning more towards technical analysis).
5. Prioritize funds management, followed by technical analysis, and lastly, fundamentals. Ensure principal safety first, making sure most positions are profitable (cut losses early if they start losing). Use technical analysis to determine entry, adding, and reducing positions. Focus on fundamentals last.
