What is the most important thing to make money in a BTC bull market? Teach you how to establish a trading system and master the 4 major buying and selling rules

Most Seasoned Traders with more than five years of trading experience can deeply appreciate that in the early stages, they often rely on intuition for trading, but frequent losses make them realize that intuition is far less reliable than a stable system. Intuition amplifies human weaknesses, and the weaknesses in human nature are something we cannot completely overcome. The only way to regulate them is through a system. If you are a Newbie and still rely on inspiration for trading, then it's time to start building your own trading system!

There is no risk-free trading system

The trading system is actually a trap operating system that is placed in a computer and can be understood as a complete human-computer interaction system. People make the computer work through this system. From a biological perspective, it is similar to conditioned reflex, that is, 'when an A signal appears, a B action must occur'.

The trading system is a comprehensive set of signal rules about getting on board, exiting, buying and selling, stop loss, and take profit.

There are many misunderstandings about trading systems. Some people believe that the reason they cannot make a profit is due to the lack of their own trading system, and once they have a trading system, they can achieve profitability. Others believe that the reason for not achieving excess returns is that their existing trading system is not good enough, so they need to find a better system. Some people firmly believe that there is a magical trading system in the world, and as long as they follow its operations, they can make a steady profit.

Are these viewpoints really credible?

First of all, it needs to be clear that there is no such thing as a "perpetual motion machine" or "elixir of life" in the world, and there will naturally not be a universal and perpetually stable profit-making trading system. If such a system existed, intelligent people would have already discovered and utilized it.

Secondly, even with an excellent trading system, it does not necessarily mean that stable profits can be achieved. An excellent trading system first requires users to have strong execution, and be able to follow its instructions 100%. In addition, a good trading system may not necessarily be suitable for everyone. Everyone needs to find a trading system that suits them, which cannot be evaluated with standardized 'good' or 'bad'.

To find a suitable trading system, first you need to have a correct understanding and positioning of the role of the trading system.

The trading system is similar to military strategic thinking. By fully adhering to these guiding principles, it may not guarantee victory in every battle, but at least it ensures that one does not suffer a disastrous defeat and leaves opportunities for future actions. The trading system operates at the strategic level, while the combination of 'operational thinking' and 'operational strategy' belongs to the tactical level, and the specific trading actions are expressions of the tactical level.

By correctly understanding the role and limitations of the trading system, and combining with its own characteristics to find the appropriate system, can achieve better results in the transaction.

So how do you evaluate a trap operating system?

When evaluating a trading system, I believe that it is only necessary to follow a core key indicator, namely the "profit-loss ratio". The so-called profit-loss ratio refers to the average amount of profit divided by the average amount of loss.

For example, if you invest 1 million yuan and trade 10 times with a certain trap operating system, making a profit 4 times, with profits of 150,000 yuan, 250,000 yuan, 350,000 yuan, and 450,000 yuan respectively; and losing 6 times, with losses of 100,000 yuan, 150,000 yuan, 100,000 yuan, 50,000 yuan, 70,000 yuan, and 200,000 yuan. At this point, the average profit during profitable times is 300,000 yuan, and the average loss during losing times is 111,700 yuan, with a profit-loss ratio of 30/11.17 ≈ 2.69. If you continue trading using this trading system, whether it's 100 times or 1000 times, with a profit-loss ratio of 2.69, theoretically, it is possible to achieve profits. A profit-loss ratio below 1 indicates losses.

However, when making an objective evaluation, we need to consider certain redundant factors. In my opinion, the profit-loss ratio should never be lower than 2. Specifically:

A profit-to-loss ratio of 3 can be considered a passing grade, equivalent to 70 points;

A profit-to-loss ratio of 4 can be considered good, i.e. 80 points;

A profit-loss ratio of 5 can be considered excellent, equivalent to 90 points;

A trading system with a profit-loss ratio higher than 5 can be considered perfect.

It should be noted that trading systems with a profit-loss ratio greater than 5 are very rare. It is recommended that everyone calculate the profit-loss ratio of their long-term trading system (or buying and selling rules) in order to better evaluate its effectiveness.

What elements need to be included in the design of the operating system

Before establishing the operating system, we should first ask ourselves, what is the purpose of the investment? Is it to get rich overnight? Is it stable appreciation? Or rapid appreciation? In addition, what is the expected rate of return? Is it 100% per year? Is it 100% per month? Is it 30% per year? Is it 30% per month? Is it 200% per year? Or 50% per year? All of these questions will greatly affect how we design our own operating system.

In addition, how about our risk tolerance and risk preference? Can we tolerate a significant drawdown of more than 30%? Can we tolerate a minor drawdown of less than 20%? Can we only tolerate a slight drawdown of less than 5%? Or can we not tolerate any drawdown at all? These are several questions about risk that must be considered. Without clarifying these questions, blindly establishing an operating system is not significant, or at least not the most suitable for oneself.

A complete operating system should include the following seven elements:

Cycle judgment: Understand the general trend of the market, judge the current market cycle (such as bull market, Bear Market, volatile market, etc.).

Operational thinking: The basic concepts and strategies of clear operation, whether to pursue fast entry and exit in the short term, or long-term holding.

Coin selection: Select potential stocks based on certain criteria and methods.

Timing: Determine the best time to buy and sell.

Trading rules: Establish clear buying and selling strategies, including entry and exit conditions.

Capital Management: Allocate funds reasonably, avoid excessive concentration or dispersion, and ensure the efficiency and safety of fund utilization.

Risk control: Develop Risk Management strategies, including stop loss mechanism, Position control, etc., to control and drop investment risk.

By comprehensively considering and integrating the above factors, one can establish a suitable operating system to more effectively achieve investment goals.

Let's take a closer look below.

1. Cycle Judgment

Going with the trend is the first principle of investment. When the market is rising, the success rate of our various strategies, coin selection, and timing abilities will significantly increase. Even if the strategies and timing abilities are not perfect, it is possible to make money from swing trading in a rising market. Furthermore, if it is judged that the market is steadily rising, the mentality of Holdings will be more stable, and even dare to buy at the low point, thereby reducing the cost of holding coins and obtaining the maximum profit. On the contrary, if there is no clear judgment on the market trend, the mentality of Holdings will be restless, and it is easy to overreact due to slight Fluctuation, leading to operational distortion.

And, the judgment of the cycle will provide important reference for subsequent operations. In a Bull Market, all buying and selling operations should be Heavy Position and concentrated; in a Bear Market, all buying and selling operations should be Light Position and diversified.

2. Operational Thinking

The operation mindset can also be called the operation strategy under different market conditions, but this operation mindset can only be determined based on the judgment of the market, so the accuracy depends on the ability to judge the market. The operation mindset is like planning a battle, how long to fight, how big the battlefield is, these need to be set in advance. You can't modify the battle plan while fighting, arbitrarily increase troops, or change the direction of the operation at will.

3. Select Coin

Especially in the bull run, the importance of selecting coins is even more prominent. If you want to achieve excess returns, you must carefully select the currencies you hold and try to avoid frequent currency exchanges in the bull run. Frequent currency exchanges may result in missed opportunities for price increases, often resulting in significant price increases for the sold coins while the held coins perform poorly. The key to profits in a bull run lies in the combination of heavy investment and holding time.

For large institutions and large funds (with assets under management of over 100 million yuan), the importance of coin selection is even more significant. Global stock long positions funds rely on stock selection as their unique advantage, which is also an important symbol to distinguish different funds. Timing operations usually assume that they can beat the market. Operators managing funds of several million levels may still profit through timing, but once the scale of funds increases, the effectiveness of timing decreases significantly.

What characteristics should a coin with excess returns have? We can look at it from the perspective of a dealer. If you are a dealer, or an institution, or known as a Market Maker, and you have a large amount of capital to operate a coin, which coins would you choose?

The float is small, but it cannot be too small. The circulation of a too small float is relatively poor, and funds are not easily accessible and cannot operate smoothly.

Both have trending big topics and no historical legacy issues, such as being previously speculated by major dealers or having a poor market image.

If there is solid on-chain data support or future potential for performance improvement, when the coin price reaches a high level, 'performance improvement + high distribution (such as Airdrop, Dividend, on-chain rewards, etc.) + theme' can complete the dump without causing a big dump in the coin price.

4. Timing and Buying and Selling Rules

Timing is the precise confirmation of entry and exit points, mainly divided into swing trading in the short term and speculation. The buying and selling rules are the clear definition of trading discipline. For example, when buying, it must meet the buy point requirements of the technical indicator, and it should be a short-term buy point, and the price should rise quickly after buying. Timing is the primary means of risk control, and even in a bull run, there may be a large adjustment. The core function of timing is to avoid these adjustments and major bear markets. If the market conditions are not good, it is recommended to observe Short Position.

In the trading system, buying and selling rules should have a certain degree of flexibility and subjectivity, accounting for about 20% to 30%. Completely fixed buying and selling rules will lead to a programmatic trading approach, lacking adaptability. The buying rules vary depending on different operational thinking and market conditions, and different market conditions will generate different buying points. However, there is one basic principle that must not be violated: buying must be based on technical buying signals.

The selling rules also vary with market conditions and operational thinking. Different expected returns will lead to different take profit strategies. Selling does not necessarily have to wait for a technical selling point, as by then one or two bearish candles have often appeared, resulting in greater profit loss. Therefore, the selling point needs some anticipation, and once the take profit level or possible high point is reached, selling can be considered.

By setting such rules, traders can flexibly respond to different market conditions, maximize profits, and effectively control risks.

5. Fund Management

Capital management is a trap discipline. For example, 'in an accounting year, transfer out 10% of the profit for protection'; 'after the first Open Position, open a new position with profit, etc. Another important point to consider is the 'leverage issue'. Of course, many pros in the crypto world achieve financial freedom through leverage, so whether to add leverage, and how much leverage to add, varies from person to person. But it is important to note that the investment industry has a saying 'profits and losses come from the same source', meaning that the place where you make money is often the place where you lose money. There are many wealthy people, as well as many who get liquidated. For newbies, it is recommended to use leverage cautiously, as leverage amplifies the emotional fluctuation brought about by market fluctuation, leading to less than ideal trading results.

6. Risk Control

Risk control is some iron rules, everyone has different experiences and regulations. The risk control terms play the final guarantee role in the operation process, ensuring that you will not make mistakes due to 'greed' and 'luckiness'. In addition, firmly remembering the risk control terms can also keep your emotions calm, avoiding unnecessary losses caused by emotional Fluctuation.

Trading System Example

The trading system provides clear signals to get on board and exit, making trading more standardized. Buying and selling operations are only conducted when the system issues signals, and patience is required at other times. For existing positions, regardless of profit or loss, they should be held; for those without positions, operations should be carried out when the system signals appear.

The reason why the trading system is called a standardized operating system is mainly to avoid the arbitrariness of investors' trading. Because human nature has its weaknesses, and mentality is a crucial factor in trading. Although subjective trading can be carried out, even the simplest system can provide certain standards. For example, a moving average strategy: buy when the price line is above the line, and sell when the line is below. Even rules such as buying stocks when encountering smoggy days in Beijing and selling stocks when the sun is shining brightly are considered a system. Similarly, there are some simpler so-called 'systems', such as buying stocks on a single day and selling stocks on the second day. Although these systems may not necessarily be profitable, at least they provide a complete set of rules to help traders avoid emotional operations.

The most complex operating system requires top mathematicians to build several complex mathematical models on the basis of massive data and conduct automated trading with the help of computers. For ordinary traders, the operating system is not better with simplicity or complexity, but with efficiency. Simplicity, complexity, and quality are not necessarily related.

Take an example, in simple MA, the most famous is the Granville eight methods.

Graham's four major buying rules:

The moving average gradually transitions from a decline to rise, and when the stock price breaks through the moving average from below, it is a buying signal.

Although the stock price falls below the average line of rise, it soon turns upward again and operates above the average line. At this time, you can increase your position to buy.

The stock price is falling but has not broken the average line, and is showing a rise again. At this time, the average line is still rising, indicating a buy signal.

When the stock price falls below the average line and deviates from it, it is likely to generate a strong rebound, which is also a buying signal. However, it should be noted that after the rebound, the stock price will continue to decline, so do not hold on. This is because the overall trend has weakened, and prolonged fighting will inevitably be tied up.

Four Selling Principles Proposed by Granville:

The moving average trend gradually transitions from rise to decline, and when the stock price falls below the moving average from above, it is a sell signal.

Although the stock price has rebounded above the moving average, it soon fell below the average line again, and when the average line is still falling, this is also a sell signal.

The stock price fell below the moving average, then rebounded towards the average, but was blocked before breaking through the average, still a selling signal.

When the stock price rises sharply and deviates from the average line of 'rise', the investment risk increases sharply, and a decline may occur at any time, which is a sell signal.

In summary, the Granville's Eight Rules of Operation use moving averages to judge price trends, and the following rules should be followed:

When the moving average line rises, it is a buying opportunity, and when it falls, it is a selling opportunity; when the moving average line rises from fall and the stock price breaks through the moving average line from below, it is the best buying opportunity; when the moving average line falls from rise and the stock price falls below the moving average line from above, it is an important selling opportunity.

The Granville Eight Method is one of the simplest trading systems that everyone knows, but it seems to be too general and requires specific adjustments in different markets.

Disclaimer: Trading carries risks, and investments should be made with caution. This article does not constitute investment advice, and users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Users bear the responsibility for their own investments.

This article is authorized to be reposted from: "Shenchao TechFlow"

Original Author: 4Alpha Research