Advanced Technical Analysis for Capital Management

When trading, it is difficult to make money only with technology, and the tried-and-true technology will still be shaken at critical moments. This is often caused by the psychological pressure of heavy trading and sharp fluctuations in the market. When the pressure is huge, the technology will malfunction. The key factors to control success or failure outside of technology are fund management, reasonable position control, strict step-by-step operation, and so on.

Fund management (I)

I don't want a person to invest very little money in speculation, nor do I want a person to participate in speculation with a mortgage. The specific amount of your mileage may vary, but the profit and loss of this money must attract your attention, and at the same time, it will not let you always worry about it.

Pursuit of 95% win rate = 95% loser

Money management is a subject that is easily overlooked by newbies, most of whom are obsessed with market-testing techniques for finding high win rates, and simply assume that "if I had a 95% win rate, I would be a top speculator." Is that really the case?

Now, let's take a look at the following two traders.

A trader trades ten times on average and makes seven profits.

B traders make an average of ten trades and make three profits.

If I don't provide you with more information, I'm sure everyone wants to become an A trader with a better winning rate.

Next, we asked two traders how their profits and losses were.

Trader A hesitates: Oh, I'm so sorry I let everyone down. After ten trades, I lost 500 yuan.

Trader B smiles: Guys, I made 500 yuan.

The results must have surprised most newcomers. Trader A, who had a significantly higher winning rate than Trader B, not only made no profit, but also lost money, while Trader B, who had a 30% winning rate, made a good profit. What exactly is the reason? Look at their trading records and I'm sure you'll find out soon.

Trader's transaction history

ATrader's transaction history

Three transactions that generate losses

-370 yuan

-380 yuan

-450 yuan

Average amount of each loss: 400 yuan

Seven profitable transactions

One hundred yuan.

80 yuan.

120 yuan.

50 yuan.

150 yuan.

130 yuan.

70 yuan.

Average profit per transaction: 100 yuan

BTrader's transaction history

Seven transactions that generated losses

-100 yuan

-80 yuan

-120 yuan

-50 yuan

-150 yuan

-130 yuan

-70 yuan

Average amount of each loss: 100 yuan

Three transactions that generate profits

370 yuan.

380 yuan.

450 yuan.

Average profit per transaction: 400 yuan

AB Trader Trading Style Summary

In the trading records of both, we found that the amount Trader A made each time was much lower than the amount he lost, while Trader B did the opposite. At this point, which trader would you rather be? The answer is obvious, Trader B.

This example shows that a good speculator is not made by having a high winning rate. A speculator trades in the market to increase his capital, not to gain a higher winning rate. If a speculator only pursues a 95% winning rate, he will sooner or later become a 95% loser in the market. The market will not give such a high probability, but it will allow those who know how to use their capital to seize a few opportunities and make a big profit.

What about the remaining 5%? 4% flat, 1% profitable.

Taking a 1% loss = 4% of equals and the possibility of becoming a 1% winner

Money management is no magic trick, but using it properly can keep a novice in the market for a long time. After entering the market, a speculator should first learn how to reduce losses, then avoid losses, and finally make profits. The first element of money management is to minimize losses on each trade.

Let's do a coin toss game. Your capital is 10,000 yuan. If you judge correctly, you will receive 100,000 yuan in prize money. If you judge incorrectly, you will lose 10,000 yuan in your hand. It looks beautiful, right? You decide to start the game, and the coin lands - and you lose! You are penniless and will never have the opportunity to play the second game. Although you felt so close to the 100,000 yuan bonus before, now you have lost the chance to get it forever.

Most speculators have played or are playing this beautiful but dangerous game. This method is really not a clever speculation. Anyone can make mistakes, and God is no exception. This way of blindly taking risks with all your money is actually more like gambling. The correct speculation should be to take certain risks when you have a certain chance of winning.

The coin toss game is still going on, and your capital is still 10,000 yuan. Assuming that this game is played 300 times, you will get 2,000 yuan if you judge correctly, and you will lose 2,000 yuan if you judge incorrectly. What is the probability that you will be eliminated? Greater than 99%! In 300 judgments, you will always have bad luck sometimes. Once there is a "win, lose, win, win, win, lose, lose, lose, lose, lose." situation, you only need 11 times to be eliminated. What if you reduce the win and loss to 100 yuan each time? In 300 judgments, what is the probability that you will be wrong 100 times in a row? Less than 0. 1%! The only way to ensure that you will not be eliminated in this game is to reduce your bet.

Speculators can guarantee that they will not lose money as long as they do not trade, but this also gives up the possibility of profit. However, if you keep the position and loss of each speculation within a very small range, you can stay in the market for as long as possible. This is necessary in the stage of accumulating experience. It can save you from the disaster experienced by most speculators, so that you can leave the market before the dawn of success.

Fund management (2)

The 1% principle for initial capital and the 1% principle for floating capital

The 1% principle can be divided into two types. One method is to divide the funds into two equal parts, one as the activity capital and the other as the risk-taking fee. For example, if you have a total capital of 100,000 yuan, then you can bear a loss of 500 yuan per trade (100000/2/100 = 500). This method is called the 1% principle of initial capital. I strongly recommend that every novice abide by this principle and apply it to their own trading. Its biggest advantage is that it can keep your trading size at the same level all the time, so that there is no loss of 50% of the funds and you need to earn 100% to restore the initial capital. This is a huge advantage for beginners.

Another approach is to use the movement of funds to constantly change the risk-taking fee. For example, if you have 100,000 total capital, you can afford to lose 1,000 yuan per trade. After you make a loss, your capital is reduced to 99,000 yuan, so the loss you can bear per trade is correspondingly reduced to 990 yuan, and the risk-taking fee is increased when you make a profit. According to theory, if you apply this 1% principle known as floating funds, your chance of taking on 1% of the risk is "unlimited". Speculators, like football players, even the best players will experience ups and downs in their state, making profits when they are in good condition and losing money when they are in bad condition. The same state also has continuity (or trend). The 1% principle of floating funds makes good use of this. It continuously reduces risk when the speculator is in bad condition (loss state) and increases profits when the speculator is in a brave state (profit state).

The relationship between position size and the 1% principle

Position size is a balance, with risk on the left and profit on the right.

When formulating a trading plan, apart from what to buy and what to sell, there is another important factor - how many positions to open. Position size is always accompanied by losses and profits, and the two are balanced. If a speculator wants to make a lot of money on a trade, he must use more capital, which also means taking more risk. "To make a lot of money, you have to take a lot of risk!" Sounds good, but the clever use of position size can tilt the balance, and when the speculator has fully mastered the art of position size, the balance will appear to be one-sided (of course, the balance is also one-sided for those who know nothing about the control of position size, just in different directions).

Now take the 1% principle of initial capital as an example, let's combine it to talk about the problem of position size. Suppose you have 100,000 yuan of capital, then you can bear a loss of 500 yuan per trade, which limits your risk. If you operate soybeans and build a 1-lot position, you can bear a loss of 50 points. If you build a 5-lot position, you can only bear a loss of 10 points. In the case of limited risk, the more positions you have represent the lower your ability to resist market shocks. If you can't withstand shocks, you are doomed to be unable to trade in a large time frame. Most people are wrong to think that day trading should be light. On the contrary, the essence of day trading lies in large enough positions. For a shrewd day trader, larger positions are better. Large position sizes do not equal high risk. So when to take advantage of small position sizes? Using small position sizes on a daily or weekly frame can have unexpected benefits. Loose volatility conditions can keep speculators in the right general trend without being swayed by small retracements, and can ensure that you can sleep soundly.

Fund management (3)

The lover of successful trading - stop loss

Perfection is as sensitive and fragile as a conceited heart, which is naturally narrow and fragile.

Stop-loss is an effective means to control risks and expand profits in the market. According to the difference in usage, stop-loss can be divided into five parts: fixed capital stop-loss, technical point stop-loss, risk-free stop-loss, follow-up stop-loss, and time stop-loss.

Any trader when considering a trade, the first thing you should care about is how much risk you take. This requires traders to make judgments based on the possible profits. Once the risk-bearing amount is set, it will never be added. This is the fixed capital stop loss. Under normal circumstances, I recommend the 1% principle mentioned in the previous article, which can effectively protect funds. Then, we look for a technical support as the second basis for stop loss. We usually use support and resistance levels and establish positions at these positions. The space between this position and the fixed capital stop loss level is the risk space that traders allow prices to float. If the price fluctuates repeatedly at the technical level, indicating that the technical level may be invalid, then you can enter the market before the fixed capital stop loss to form a technical stop loss.

After setting a fixed capital stop and a technical stop, if the price moves a certain amount in the direction the trader expects (the general principle is 2%), the stop can be increased to the cost level of opening a position, which is the break-even point and a risk-free point. This method is called a risk-free stop. A risk-free stop can help a trader establish a "money picking opportunity". Profits can be made by cashing out the position at any time, and there will be no losses in the worst case scenario. In addition, risk-free stop-loss is also a good way to adjust the trader's mentality. The most worrying thing for beginners is when to stop-loss. I have observed many beginners who can quickly execute stop-loss in the early stages of trading or during smooth periods after accepting the correct stop-loss concept. Unfortunately, trading is not a smooth sailing game. No matter how good a speculator is, there are always their own low points. Most (the proportion is quite high, it should be more than 90%) beginners can't stand the pain caused by repeated stop-loss. They have a certain fear of stop-loss. Finally, they take the way of ostrich to escape and let their positions close to the end. Of course, they can escape a disaster or even make a fortune in many cases, but the other side of the matter and the side that often appears is bankruptcy. Risk-free stops make it easier for traders to accept, and while they will inevitably come out too early at some point, they are good at protecting money and overcoming fear.

After adopting a risk-free stop, the remaining task is to find a suitable position squaring. Under normal circumstances, very short-term trades (dozens or even hundreds of trades in a day) will have a clear target level, and after reaching it, the bag will be safe. Other types of trades will use the skill of following the price stop position squaring. The so-called following stop refers to the method of continuously adjusting the stop level following the trajectory of the price moving in the desired direction. Correct use of following stops can effectively protect existing profits and ensure that traders will not cash in profits prematurely in a large market. For example, if you buy EUR/USD 1.5000 and the price quickly rises to 1.5100, then the stop loss will be changed from 1 to the risk-free stop. 5000 adjusted to 1.5050, which not only locked in 50 points of profit, but also gave the position the opportunity to continue to profit. The specific implementation methods of follow-up stop loss are mainly divided into fixed range adjustment and technical adjustment. Fixed range adjustment increases the stop loss after obtaining a certain range of profit. For example, for every 5% profit, the stop loss will be moved up by 3%; technical adjustment has strong requirements for traders' technical analysis ability. The most commonly used is the price moving average. The price moving average will change with price changes. It follows the trend and has the role of support/resistance. Traders who use the price moving average as a follow-up stop loss tool appear when the price crosses the moving average in reverse. It is important to note that no matter what technique you use to follow the price, you must try to maintain the objectivity of the transaction, and the less subjective the better.

A speculator has no risk only if he does not hold any position. When a speculator deeply understands that the purpose of coming to the market is to make money, it is possible to learn the method of time stop loss. Time stop loss adds the element of time to the space provided by risk-taking funds. It adds a new protective film to the survival of funds. When we are optimistic about the rise of the market, we must not only assume how much it rises, but also when it rises. Once the market does not rise within the expected time, no matter what the current price is, we will appear. Execution time stop loss is not an easy task, because it is always used, it is likely that most trades will be stopped, and most importantly, it also requires speculators to overcome the natural enemy of trading - hope.

Ask every speculator to accept losses in trading, and don't forget that trading is a human game, and those with an open mind are more likely to succeed.

Your area of control

What is your control? In a trade, the best and worst outcomes you know and have been accepted by you are your control. The key to a successful trading career is whether your trades are always within your control. This is the secret of all things money management.

Finally, I would like to summarize the content of money management with a quote from Soros: "Speculation itself has no risk, only out-of-control speculation has risk."