A well-designed trading system must address each decision point within a complete trading cycle. This includes entry points, exit points, re-entry and exit points, and the allocation of funds. These rules must be clear, objective, and unambiguous, leaving no room for differing interpretations. The system should also align with the user's psychological traits, the statistical characteristics of the investment targets, and the risk profile of the invested funds. Often, in the investment process, we encounter a situation where the market moves as predicted, yet the final trading outcome is disappointing. I believe that accurate analysis is merely the first step towards successful investing. Successful investing requires not only accurate market analysis but also precise risk management and emotional control. These are the very issues that a trading system aims to resolve. Firstly, a trading system can effectively control risks. During trading, we frequently face difficulties with exiting a position and setting stop-losses. In leveraged forex trading, the importance of stop-losses cannot be overstated and must be strictly adhered to by all traders, much like how drivers follow traffic rules. However, exiting a position, especially when incurring losses, is challenging. Investors who meet with failure often make similar mistakes. The difficulty of exiting stems from psychological barriers, which a mechanical trading system can help overcome. A trading system standardizes, formalizes, and makes the investment decision-making process transparent. Investors shift from an emotionally driven, ambiguous decision-making process to a quantified, systematic approach—transitioning from judging the validity of signals to confidently executing the system's signals. With the help of a trading system, when investors can consistently, accurately, and thoroughly execute all system signals, it can be said that they have truly opened the door to success. There are countless trading systems and indicators, much like the myriad of martial arts techniques; there is no single "best" one. The best system is the one that suits you. Therefore, rather than discussing the specifics of my trading system, I will focus on how to build a trading system that works for you—teaching you to fish rather than giving you fish.
Entry Points
Regarding the selection of entry points, please note that I use the term "selection" rather than "judgment," because different trading styles will result in different entry points. Here are a few summarized methodologies:
1. Limit Order Method: Based on various indicators, such as Fibonacci retracement levels or round number thresholds, you preemptively predict that the price will reach a specific point. By placing orders at this point in advance, you can capture the maximum profit if the prediction is correct, leaving no point missed and gaining a great sense of accomplishment.
2. Support and Resistance Level Method: By using various methods to judge support and resistance levels, like previous support/resistance or moving averages, you can preemptively predict where prices will encounter support or resistance and place orders accordingly.
3. Indicator-Based Entry Method: Deciding on trade entries based on various indicator patterns, such as MACD crossovers, RSI overbought/oversold conditions, and even various EA (Expert Advisor) automated trading programs.
4. Pattern-Based Entry Method: Entering trades based on various candlestick patterns, ranging from large patterns like triangles and head-and-shoulders to smaller candlestick formations like morning stars, hammer lines, ascending/descending channels, and Elliott Wave patterns.
5. Breakout Entry Method: Entering trades at the moment of breaking out of a sideways market or consolidation range.
6. Intuitive Entry Method: Entering trades based purely on intuition without any rationale. This is favored by beginners, though even experienced traders sometimes rely on gut feelings. Among the 95% of traders in the market, entry methods generally fall into the categories I've listed. Of these, methods 1—5 require varying degrees of technical skill, while method 6 can either involve very high or very low technical content and will not be explored in detail here. In the financial markets, traders who can ultimately stay afloat and make a living from trading achieve what is referred to as "consistent profitability." The emphasis is on "consistency," so when building a trading system, it's crucial to avoid all aggressive factors, such as chasing retracements, overtrading, or left-side trading.
Trade rhythm is like the cyclical yin and yang of Tai Chi; trending and consolidating markets also follow a cyclical relationship. Consolidation follows a trend, and a trend follows consolidation. There is even a saying that the longer the horizontal movement, the bigger the vertical leap. Therefore, I personally do not choose the first entry method. Following a significant rise or fall, the market mostly enters a consolidation phase. Even if you capture the highest or lowest point, you will likely have to endure a long wait.
Exit Points and Predicting Consolidation The reason these two topics are discussed together is that before addressing them, we must resolve the issue of analysis periods. Many people ask what time frame to look at, but there is no standard answer, as the market is dynamic and complex. No single period can address all market conditions. For an extreme example, if you are trading short-term, you cannot rely on monthly charts for entry and exit confirmation. Likewise, for long-term trading, a one-minute chart won't reveal target levels. Therefore, my approach is to use multiple time frames. I use shorter periods to confirm entries, longer periods to gauge the extent of the market move and predefined exit points, and shorter periods again to confirm exit signals. While single-period analysis can work, it is often limited. The market's extent and consolidation time are linked to the time frame. A trend initiated on the daily chart is not comparable to that on a five-minute chart; consolidation is similar. A five-minute chart's consolidation might end in one or two hours, whereas the daily chart's consolidation might last several weeks. Let's start with trending markets. Whether trading short-term or long-term should not be based on personal preference but rather on the market's status. A trend initiated on a five-minute chart is obviously short-term, but if initiated on a daily or even weekly chart, why should we restrict ourselves to short-term profits instead of holding long-term? The root cause is an incomplete trading system that cannot differentiate whether a trend is short-term or long-term. In my view, the trading signals are the same for short-term and long-term; the difference lies in the period, affecting the duration and magnitude of the move.
Consolidation Analysis Based on different time frames, consolidation influences your trading strategy. For instance, if a daily chart shows consolidation, you can only trade within shorter periods than the daily chart. If a monthly chart shows consolidation, it allows trading at the daily chart level. If a 60-minute or 30-minute chart shows consolidation, it signals a break from trading, allowing you to leave the computer and do other things. Many traders, even experts, cannot predict consolidations in advance and end up placing orders and stopping losses repeatedly during sideways markets, losing nearly all previously earned profits.
A complete trading system, proven effective through extensive market validation, allows you to enter at breakout points. As for grasping exit points, if your entry is well-timed, then using support/resistance levels and moving average support/resistance for exits can already enable you to achieve consistent profitability.
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