In this world, everything can be arranged except for your heart. Losing anyone in this world is not terrifying, what matters is losing yourself. There is still a long, long road ahead, which must be walked alone, relying on oneself, completing it with one's own abilities. This world will not necessarily give back because of your contributions, nor will it require others to treat you in the same way you treat them. The hardest thing about living in this world is to maintain a sense of humility and peace, and this humility comes from inner sincerity and solid effort.
You must believe that everyone and everything you encounter in your life has its value and meaning. Some people teach you love, some events teach you growth. Even if they only leave a shallow mark on your path, that is a precious asset. At least at some point in the past, you understood life, and you understood yourself. Let's think this way: Efforts that yield results are training, and efforts that do not yield results are tempering. Regardless, every experience is an indispensable element of your life.
Before having a high win-rate contract trading system and perfect capital management, it is very difficult to have a good mindset. Don't tell me that you currently have a good mindset while holding a losing position; I can only say that you have reached the highest realm of being fooled by yourself!
Mindset = Good capital management + Win rate > 30% trading system.
Among the winners in the cryptocurrency contract market, technology is secondary. The core of their trading is capital management, risk control, and trading strategy.
The reason they can make money is that losers do not execute, or do not strictly execute, or do not comprehensively implement capital management, risk control, and trading strategies.
If both armies face off and technical analysis is a weapon, both sides must be evenly matched; however, if one side thinks that the brave will win when two strong forces meet, charging heedlessly into battle amidst gunfire, they will certainly be defeated. They did not lose due to weaponry, but due to a lack of understanding of defense, strategy, and troop deployment, which in our trading context translates to risk control, trading strategy, and capital management.
If everyone strictly, scientifically, reasonably, and comprehensively implements and adheres to capital management, risk control, and trading strategies, then technical analysis can influence the winning and losing patterns.
Seeing this, winners focus their efforts on capital management, risk control, and trading strategies, never nitpicking on technical analysis, and their requirements for technical analysis are very rough, which is enough to allow them to continue being winners for 10, 20 years. Because their vision is broad and their insight profound, they are incomparable and unassailable by traders who only focus on technical analysis.
Failed traders do not understand what forces influence trading; they are stuck in a pile of technical analysis books and cannot extricate themselves.
The reason losers and winners are neck and neck in technical analysis is also due to something inherent to technical analysis itself. For example, the Dow Theory assesses trends only after the market has moved 30%, which means missing opportunities to buy low and sell high.
In the end, technical analysis is a probability issue. No matter how good your skills are, you only have a slightly larger chance of success, with a confidence level of about 50%-60%. Conversely, someone with poor skills may only be slightly worse off, with a success probability of 40%-50%, which is not much different.
For example, after a trend peaks and the market has moved about 30%, there shouldn't be much disagreement on whether it has reached the top. Traders with differing opinions will likely say it is close to the top. From the perspective of the overall trend, opinions are generally the same, and the discrepancies can be disregarded, as they do not lead to significant differences in winning or losing.
However, if you fully invest or heavily invest at this point, problems arise: our traders may see the trend correctly in large directions but lose money due to being shaken out by minor adjustments that are not significant, regrettably missing the trend in a moment of distraction.
Lightly building positions is not scary because the losses are minimal. You can just follow the market, and it won't shake you off or drive you away. You can ride the trend down, and if you manage your small positions dynamically, adjusting as needed, you can make big profits.
The difference in technical skill between the two sides is at most 30%. You may think highly of your skills and invest heavily without executing capital management; while those who are slightly less skilled may feel inferior and try small positions, managing their funds effectively.
In the end, those who get washed out and lose big money are definitely the ones who entered heavily with high skills; while those who are slightly less skilled will continue to follow the trend down, even if they won't make much profit. However, they create a gap in funds compared to heavy investors. After several cycles, over one or two years, the difference between them becomes like that of a beggar and a millionaire.
So how do we manage capital well? The trading system is the prerequisite for capital management; we need to understand what capital management is. Moving from prediction to non-prediction is a hurdle that requires gradual understanding—once you grasp it, it will naturally make sense. Until you comprehend it, no amount of face-to-face explanation for ten days or a month will yield results.
A mature trading system should include capital management; capital management should not exist independently of the trading system. Remember, it should not be independent, not that it cannot be. Personally, I believe it is essential to accurately understand the concepts of trading rules and capital management.
Starting with risk control to achieve capital management, to make it easier for everyone to understand, I will use the previously discussed moving average trading system and Bollinger Bands for explanation: Golden cross opens long positions, death cross closes long and opens short positions.
Assuming the accuracy of the moving average trading system is 30% and the average win-loss ratio is 7:3, then without considering trading fees and costs, the entire trading system cannot make a profit.
How to understand this? For example, if you trade 100 orders, 30 orders make money, and 70 orders lose money. The average profit for winning orders is 70,000, and the average loss for losing orders is 30,000. In total, you end up with nothing.
In reality, trading rules and systems based purely on indicators can mostly only avoid losses.
Hypothetically, if backtesting long-term historical data shows that the system's maximum loss reaches 80%, then we can say that this system not only does not make money, but also has a very high risk factor. A maximum drawdown of 80% is terrifying.
How to understand this? Suppose you have one million in capital, with the maximum loss dropping to only two hundred thousand. Even if the final result is that you can earn back to one million, the risk during the process is enormous, and it can be said to have gone out of control. If you encounter a terrible black swan event, you could explode your account at any time.
For a system that is risky and does not earn much, does that mean it cannot be used at all?
The answer is: definitely not.
First, let's look at the risk—the system's maximum drawdown is 80%. Can this risk be reduced?
Of course, if you reduce the position size by half, then the overall risk factor will also be halved, and the maximum drawdown will become 40%.
Next, what if we reduce the position to 25%? Then the maximum drawdown will also drop to 20%.
When we write 'maximum position control within 10%' as a rule in our trading system, we get a low-risk system with a maximum drawdown of 10% that does not earn money.
Note that this 'maximum position control within 10%' is a simple and straightforward rule in a capital management system, mainly used for risk control.
The control of risk in a trading system comes from reasonable capital management.
Changing the subject a bit, everyone knows that full warehouse operations are not allowed, but most people do not understand why full warehouse operations are not allowed. The answer is right here.
Capital management amplifies profits.
For us, a low-risk but not very profitable trading system is actually of little use. So let's get to the point: how can this system achieve positive returns and make money?
In actual operations, not changing the opening and closing rules cannot change the 30% accuracy rate. We also cannot change the 7:3 win-loss ratio. Although it is helpless, it is not without a solution. We can change the position size. If we can keep the average position of winning orders at 10% and the average position of losing orders at around 5%, then we can achieve profitability.
Capital management here plays a role in maximizing profits. Good capital management can turn a system that originally does not make money into a money-making system, and a system that earns small money into a system that earns big money.
To sail in the sea of books, one must be diligent; to tread the path of learning, one must persevere. You will surely return from the journey of knowledge with a full load. Helping others is like helping oneself. I wish to walk with you. Here, we not only teach people to fish but also give them fish! Daily updates on the essence of cryptocurrency trading—don’t miss out.
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Impermanence brings impermanence brings impermanence!!!
