To become an excellent trader, you must achieve these 3 points.
The market is actually like a forest. Once you enter, it's difficult to find your way out without any signposts. Therefore, we need to elevate ourselves and stand on the mountaintop to have a bird's-eye view of the market. First, observe the market and plan our route, and then put our plans into action. This way, we may have a better chance of navigating the market and developing a trading system more efficiently.
Source: Red and Green
Risk control can be divided into many categories, such as data risk control, fund management risk control, system drawdown risk control, platform security risk control, trader mentality risk control, and so on. These are all considerations for an excellent trader or trading team.
Let's illustrate the importance of risk control with some examples.
For instance, the Swiss Franc Black Swan event. Without data risk control, even if a trader had a hundredfold profit, they might lose all their profits or even go bankrupt due to a single data point, as stop-loss orders would become ineffective. In this case, no matter how well you trade or how much profit you make, it would be irrelevant.
Another example is the collapse of platform providers, such as Lehman Brothers and Bear Stearns. These world-class investment banks have the possibility of bankruptcy. There are also numerous international forex platforms like IronFX and a regulatory platform in the United States during the 2008 financial crisis, as well as countless domestic platforms. Although the probability is less than one in ten thousand, it can still happen. No one can guarantee that it won't happen to them. So, what use is the profit you made if you didn't implement platform security risk control?
Take the case of rogue trader Nick Leeson. Without proper fund diversification control and trader mentality control, the profits of the trading team would still be irrelevant to you. Are these trading system issues? No, they are issues related to various unexpected risks. Therefore, risk control needs to be considered before engaging in trading.
Now let's talk about how to establish a trading system and the issues that need to be addressed. What is the purpose of building a trading system?
In a well-established trading system, there is no room for trader mentality. It can be said that it surpasses the psychological barrier. In systematic trading, all rules are concrete, standardized, and quantified. Trades are executed at predetermined levels, just like going to work. You trade when you should trade and wait when you should wait. This makes trading much easier.
So, what is the biggest bottleneck in trading? It is how to form a systematic trading approach. Often, when building a system, we encounter continuous problems: how to standardize, how to make it specific, how to ensure system consistency, and how to achieve good profitability, win rate, and risk-reward ratio. This involves forming the correct market perception, which requires extensive reading and learning. Avoid diving headfirst into the market, getting trapped in a trading loop, fixating on minor details, and engaging in futile trades.
Once the system is formed, it is important to validate it repeatedly through post-analysis, problem identification, improvement, further analysis, improvement, and post-analysis again. This process requires a lot of effort. The formation of each system requires continuous post-analysis and problem identification. It involves addressing consistency issues, balancing probabilities and risk-reward ratios, balancing price and time axes, and balancing trading and personal life. Therefore, for an excellent trading system, it is not just about achieving trading profits but also about achieving a fulfilling life. Trading is a means of making a living, and life remains the core. Only when trading becomes as simple and effortless as a beloved job can it be considered an excellent trading system. Success is about repeatedly doing the right things. If you find that execution is not going smoothly, then go back and look for any flaws in the system. When a system is first formed, most people will think it's good during the review, but when it comes to execution, they realize it's not what they expected. Here are two reminders:
When we talk about being specific, it refers to the price axis, which means that entry and exit (stop loss and take profit) must be based on solid reasoning. Objectivity means not adding emotional colors when analyzing and reviewing.
Remember, you cannot stare at the market 24 hours a day looking for opportunities. When reviewing, you also need to confirm the time spent observing the market. This is the key to achieving harmony between trading and life. In fact, everyone can write a trading journal while executing the system, and then compare it with the review results. The purpose of doing this is to enhance execution discipline and identify blind spots in the system. By eliminating all blind spots and persisting for three months, you will find that trading is not difficult at all.
In fact, these are the key points that excellent traders need to possess.