Finding a profitable trading system is not actually difficult, but when a thousand people use it, there will be a thousand different outcomes. Just like the trading system in "Way of the Turtle," only 1‰ of people stand at the summit, ultimately achieving profitability, while others can only become cannon fodder in the war of trading.

I used to say that to truly achieve stable profits, you must be extraordinary. While others like to chase rising prices and sell off in panic, or blindly cut their losses, or are overly fearful and greedy about trading, you must go against the grain to surpass 99% of people and get a share of the market. However, after so many years of trading, I've found that overcoming the weaknesses in one's own nature is really too difficult.

So instead of painfully changing myself, it's better to change my trading system to better suit my personality, making me more comfortable and at ease in trading, and allowing me to consistently execute it through both favorable and unfavorable trading conditions.

Today, I will explain from four perspectives on how to create a trading system that is comfortable for oneself, and I believe this experience will be helpful to everyone.

1. High win rate or high reward-to-risk ratio?

Many people ask me, how can I get a trading system with both a high win rate and a high reward-to-risk ratio?

Advertisement

It's like having a perfectly wonderful wife, who is beautiful, has a good figure, a good temper, can be presentable in formal settings, and is also a good cook. Is this possible? It's not, as everyone has their own flaws. Trading systems are the same; it's impossible to make money every day, and every trade cannot be a big profit.

Therefore, a high win rate and a high reward-to-risk ratio are mutually exclusive. So, how should we choose? Let me analyze it for you.

If you have a stable personality and like money to come in bit by bit, although the amount of each transaction is not very high, the continuous flow of money makes you feel very comfortable psychologically, then you are suitable for a high win rate trading system.

If you have a more aggressive personality and like to play big, such as after a series of small losses, suddenly making a big profit, and this kind of trading makes you feel very exciting and thrilling, then you are more suited to a high reward-to-risk ratio trading system.How should one operate in practice?

First, I will explain the high-win-rate exit strategy, using a simple trading system as an example for illustration.

Determine the direction: Use the crossover of EMA90 and EMA30 as the establishment of the trading direction, with a death cross indicating a short position and a golden cross indicating a long position.

Entry point: Enter the market when the price retraces to EMA30.

Exit strategy: Set it to exit with a fixed 2:1 reward-to-risk ratio.

In this schematic diagram, using a 2:1 reward-to-risk ratio for exiting, after 5 trades with 3 correct and 2 incorrect, the win rate is high, and the profits are steady. Those who do not prefer high risk may find this trading method more comfortable and acceptable, with less pressure to execute.

Next, I will explain the exit strategy with a high reward-to-risk ratio, using the same trading system.

Determine the direction: Use the crossover of EMA90 and EMA30 as the establishment of the trading direction, with a death cross indicating a short position and a golden cross indicating a long position.

Entry point: Enter the market when the price retraces to EMA30.

Exit strategy: Set it to exit when the two moving averages cross in the opposite direction.In the chart, using the moving average crossover method to exit can allow for continuous holding and capturing the profit from a $110 gold price increase. This suits traders who enjoy the thrill, as this market trend will give risk-takers a particularly "satisfying" feeling, which is also more conducive to execution.

To summarize:

High win rate and high risk-reward ratio are mutually exclusive. If you are a risk-taker, you can opt for a high risk-reward ratio exit strategy, which can yield significant profits from a single trade. If you are a more conservative trader who prefers a steady sense of happiness, then choose a high win rate exit strategy, which will aid in the execution of your subsequent trades.

Whether it's a high win rate or a high risk-reward ratio exit strategy, it's best to test it to see how comfortable you are with the market trends. Once set, maintain consistency in your trading and avoid changes, otherwise, you might miss the right market trend perfectly.

Additionally, I have written articles on my public account (Eight-Digit Garden) about how to increase the win rate and how to set a reasonable risk-reward ratio. If you are interested, you can combine these with your reading.

2. How to choose trading frequency?

Having interacted with so many traders, they can generally be divided into two categories: impatient and patient.

Take our team's trader, Old Gao, for example. He has a quick temper and reacts quickly, but lacks patience. When trading, he always wants to close positions quickly and know the results of the trade as soon as possible. Therefore, he is more suited to high-frequency trading, and I have him focus mainly on short-term trades.

On the other hand, Brother Li in our team has a slow and steady temperament. He can watch a single K-line for a month. He is meticulous and patient in his work, but sometimes his actions can be a beat slow, and his reaction to market trends can also be relatively sluggish. Therefore, I have him engage in low-frequency trading, holding long-term positions, with a very stable mindset.

When establishing a trading system, it is crucial to consider your personality traits - are you impatient or patient? Adjust the system according to your personality.What if you don't fully understand your own temper?

Before going into actual combat, you can first test with a demo account for a while. The market trend of the demo account is exactly the same as the real market, and the holding time of the simulated trading is also exactly the same as the real account.

In the demo account, we can intuitively feel our own fit with the trading frequency and holding, and whether the trading system is comfortable to use.

In addition: According to my many years of experience, newcomers to trading are fresh and prefer high-frequency short-line trading; experienced traders have been through more and prefer low-frequency medium to long-line trading. If you have just started trading and are not very patient, you can appropriately increase your trading frequency.

How to test and adjust in actual combat? (for example)

For example, different K-line cycles will bring different trading frequencies.

Take the EMA90 and EMA30 crossover trading system mentioned above as an example. The trading frequency at the 1-hour level is higher than at the 4-hour level, and the holding period in the trading is also shorter.

In the same period of a market trend, there are 2 trading opportunities formed at the 4-hour level, but at the 1-hour level, 5 trading opportunities are formed, and the gap is very obvious.

At this time, you can test and choose the trading frequency that suits you, so that you are not in a hurry, and at the same time, you can improve your satisfaction with trading.

For another example, more trading varieties will bring higher trading frequency.The same trading system will definitely trade more frequently when dealing with 4 types of products at the same time than when dealing with 2 types. For those with a quick temper, trading 4-5 times a day is enough, while for those with a slower temperament, trading 3-4 times a week is also good. Based on your own rhythm, decide how many types of products to trade at the same time, and adjust to the most comfortable state for yourself.

3. Which product is suitable for you?

We humans have different personality traits, and different trading products also have their own temperaments.

People often ask me which product I should trade, and my answer is always to choose the one that suits your temperament and makes you feel comfortable in trading, which is more likely to be profitable.

For example: If you have a quick temper and hope for fast market movements, you can trade stock index futures or crude oil. The market moves in one direction without looking back, which is very satisfying.

If you have a quick temper and choose a product like the Euro against the Swiss Franc, with a small fluctuation range, and the market has not moved much after 3 days, it can be really frustrating.

On the left is the 4-hour K-line chart of the Euro against the Swiss Franc, and over a period of 4 weeks, the Euro against the Swiss Franc has fallen 270 points from its high.

On the right is the 4-hour K-line chart of US crude oil, also over a period of 4 weeks, US crude oil has risen 1330 points from its low to its high.

The difference between 270 points and 1330 points is huge, so if you want to be comfortable in trading, you must find the right product.

I summarize the trading products into 3 categories for everyone:I categorize all varieties into three levels based on their operating space and speed. Everyone should choose according to their actual trading situation.

Category 1: The greatest fluctuation and the fastest movement.

Stock index futures (Hang Seng Index, Dow Jones Index, FTSE 50, etc.), gold, silver, crude oil.

Category 2: Foreign exchange varieties with relatively fast fluctuations and large spaces.

Sterling cross rates (excluding GBP/EUR), yen cross rates, Australian dollar cross rates, New Zealand dollar cross rates.

Category 3: Varieties with small fluctuations.

Direct foreign exchange rates, cross rates with relatively small fluctuations, such as EUR/GBP, EUR/CHF, etc.

You can test different varieties on a demo account, choose one or more that suit you, and then proceed with live trading.

4. What are your capital and return requirements?

Different capital amounts have different requirements for the trading system. With a large capital, the trading system should be set more conservatively, aiming for more stable profits. With a small capital, the trading system should be set more aggressively, aiming for a higher rate of return.For instance, consider an account with $20,000 and another with $2,000, both experiencing a maximum drawdown of 20% and an annualized return of 40%. The larger capital account earns $8,000 in a year (approximately 50,000 RMB), which can significantly supplement a family's livelihood, enabling them to accomplish quite a few things. On the other hand, the smaller capital account earns $800 in a year (5,000 RMB), which is less than the cost of an iPhone and does not align with human nature.

Therefore, traders with smaller capital accounts may appropriately increase their trading frequency or the size of their positions to boost profits. Doing so will also simultaneously increase the risk of the account, so this operation must be based on a premise: the account should not be at risk of a margin call.

For example, if the current maximum drawdown is 20% and the position size is increased to three times, the maximum drawdown becomes 60%. Although the drawdown ratio is quite large, the net drawdown is not significant ($1,200). As long as the trader has confidence and adheres to the execution, the annualized return can ultimately be tripled, reaching $2,400.

However, accounts with larger capital should not casually increase their position sizes. If the position size is tripled and a period of trading decline is encountered, the net loss of the account would be $12,000. In practice, the psychological pressure on the trader would be immense, making it easy for trading to go awry and leading to trading failure.

A reminder to everyone: when increasing position sizes with smaller capital, it must be done with a plan and standards, based on the drawdown amplitude of the trading system and one's own psychological tolerance. Grasp a key principle: it is better to be conservative than aggressive.