The Essence and Design of the Trading System

The trading system is essentially a complete set of operational rules, similar to human-computer interaction systems in computers or the conditioned reflex mechanisms in biology. It includes comprehensive signal rules regarding entry, exit, stop-loss, and take-profit.

Many people misunderstand trading systems, believing that having a system guarantees profits or that they are always searching for a better system. However, this is not the case. There is no trading system in the world that can guarantee stable profits forever, just as there are no perpetual motion machines or elixirs of life.

Even with an excellent trading system, it does not necessarily mean that stable profits can be achieved. Users need to possess strong execution ability and strictly follow the system's instructions. Moreover, everyone needs to find a trading system that suits them, rather than pursuing a universal "best" system.

The role of a trading system is similar to military guiding principles. It may not guarantee victory in every battle, but at least it can avoid disastrous defeats and preserve subsequent opportunities. Within the entire trading framework, the trading system operates at a strategic level, while specific operational thinking and strategies belong to the tactical level, and concrete trading actions are expressions of the tactical level.

When evaluating a trading system, the most critical metric is the "profit and loss ratio," which is the average profit amount divided by the average loss amount. Ideally, the profit and loss ratio should be no less than 2. A ratio of 3 can be considered passing, 4 is good, 5 is excellent, and above 5 can be regarded as full marks.

When designing a trading system, several key issues need to be considered: investment objectives, expected returns, risk tolerance, and risk preferences. A comprehensive trading system should include the following seven elements: cycle judgment, operational thinking, coin selection, timing, buying and selling rules, capital management, and risk control.

1. Cycle Assessment: Understand the market trend and determine the current market cycle.

2. Operational Thinking: Determine basic operational concepts and strategies.

3. Select Coin: Choose potential coins based on specific criteria.

4. Timing: Determine the best buying and selling opportunities.

5. Trading Rules: Establish clear entry and exit strategies.

6. Capital Management: Allocate funds reasonably and control risks.

7. Risk Control: Develop risk management strategies, including stop-loss mechanisms, etc.

In a bull market, the importance of selecting coins is particularly prominent. One should avoid frequently swapping coins and instead focus on selecting quality coins and holding them for the long term. For large fund managers, the significance of coin selection is even more pronounced.

Timing and trading rules are key means of controlling risk. Trading rules should have a certain degree of flexibility, but the basic principles must not be violated. For example, buying must be based on technical entry points, while selling requires a certain level of predictive ability.

Capital management is a set of disciplinary rules, including profit protection, position opening strategies, etc. For beginners, leverage should be used cautiously, as it can amplify the emotional impact of market fluctuations.

Risk control is a fundamental principle in trading systems that can prevent mistakes caused by greed or the gambler's fallacy. Strict adherence to risk control terms can also maintain a stable mindset and avoid unnecessary losses.

The complexity of trading systems varies from person to person, and the key lies in their efficiency rather than their simplicity or complexity. For example, the Granville Eight Methods is a simple trading system based on moving averages, consisting of four buying rules and four selling rules. Although simple, it still requires adjustments based on specific market conditions in practical application.