I've noticed that many friends like to ask me similar questions, such as:

1. How do you confirm your entry point? How can you buy at the highest point?

2. How do you set your position? How should you add to your position?

3. I always get the market trend right but can't hold on, missing out on a large profit. When should I take profits?

These questions are all very fragmented. Answering any of them in isolation is meaningless because trading is a closed loop. It's pointless to consider only the details without considering the whole picture.

There are three major closed loops in the trading market: one is the closed loop of human nature, one is the closed loop of market trends, and one is the closed loop of trading techniques.

In today's article, I will discuss these three closed loops in detail, and how to coordinate between them to create our own profit advantage.

1. What is a closed loop in trading?

In business management, there is an important concept called SOP, which stands for Standard Operating Procedure. It means a standardized process.

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We break down and refine the key control points in a certain event, and ultimately create a standardized process to guide our daily work, ensuring that the direction of work does not deviate and also ensuring work efficiency.In real life, I have encountered many people with a global perspective who possess the ability to deconstruct things and standardize them, which is also a very important module for doing big business. The same applies to trading; many of us who engage in trading are in a state of "being in the mountain," focusing very much on the immediate gains and losses, thus abandoning a higher global perspective. This is like wandering through a maze, not knowing whether we are right or wrong, why we are losing, or what we should do next.

We treat trading as a job, and the closed loop in trading is our workflow. What should we do, how should we advance each step, what should we do if the result is A, what should we do if it is B, what is our ultimate goal, and so on, in a cycle of repetition.

In a qualified trading closed loop, we will definitely not feel puzzled. We will be very clear about what we need to do next and also very clear about our trading results. At most, there may be some tolerance for errors, but the overall result will not be far off. This is a reasonable closed loop.

2. How important is the closed loop in trading?

Firstly: The closed loop in trading can improve our trading efficiency. The closed loop in trading technology is very similar to the assembly line in industrial production. The Ford Motor Company in the United States invented the world's first automobile assembly line, which greatly improved the quality and quantity of products, bringing a revolutionary increase in production efficiency.

It is a simple truth that in enterprises, those who set these standards are the leaders, and those who execute are the small employees. Do you want to have the perspective of a leader or that of a small employee?

Once we complete the closed loop in trading, we essentially have our own trading assembly line. Our trading is divided into different steps, allowing us to promptly identify and optimize problems. This reduces our error rate, improves the quality of our trading operations, and enhances the stability of profits.

Secondly: Forming a closed loop in methodology can reduce subjective thinking in our trading and increase our psychological advantage.Without a closed loop, every transaction we make would be based on guessing: how will the future trend go? What should we do next? When should we enter or exit the market? Will I lose money? And so on.

This makes every transaction very mentally and physically exhausting, and decisions made on the spot would be greatly influenced by subjective emotions. The outcome of the transactions would certainly be very unstable.

If we establish a closed loop in our trading techniques, all trading actions would be standardized and based on solid reasoning. What to do next, what to do if we lose, what to do if we profit, over time, our mindset would become very stable, much like a worker on an assembly line, knowing that as long as they follow the prescribed procedures, the results will be consistent.

The only constant in trading is human nature, and a good emotional state can greatly help us gain an advantage in trading.

Thirdly: Once we have formed a closed loop, we have trading standards, and the effectiveness of these standards can be tested.

To put it more grandly, the process of forming a closed loop is actually quantification. When you quantify all your trading actions and have the same standards, then the trading results can be statistically analyzed, and we can test the effectiveness of these trading standards.

At this point, you can use some tools, such as backtesting software, simulation accounts in trading software, etc. If your operations are random and disorderly, then even with backtesting software, the statistical results of your trading would be meaningless.

When you have tested your trading closed loop, you can not only optimize it based on the test results but also gain confidence in your trading strategy, execute more firmly, and thus form a profitable closed loop.

3. The closed loop of trading techniques

First: The closed loop of alternating long and short positions.Should one go long or short now, or wait for the time being?

Firstly, it is necessary to establish a clear-cut criterion for determining the direction. Secondly, when the direction changes, one should be able to make a clear and definite judgment. The three states of going long, going short, and waiting should be able to transition quickly and alternately, forming a closed loop.

Secondly: The closed loop of entry and exit.

In practice, after determining the long or short position, the order entry and exit should form a closed loop of opening and closing positions, but there are many details involved.

(1) After the order is entered, where should the stop loss be placed? Where should the take profit be placed?

(2) If the order is stopped out, and the long or short direction has not changed, how should one re-enter the position? After re-entering, how should the stop loss and take profit be set?

(3) After the order reaches the take profit, if the long or short direction has not changed, should one re-enter the position? After re-entering, how should the stop loss and take profit be set?

(4) The closed loop of adding or reducing positions, at what position should one add to the position, and how should the stop loss and take profit be set for the additional positions?

All these details form a closed loop, step by step, and many traders have anxiety about holding positions and cannot hold onto orders because there is no clear closed loop.

The performance after forming a closed loop:Whenever a chart is before your eyes, you know exactly what to do next and which part of the closed loop you are in. For instance, if you are looking at a trend chart, you can immediately determine which step of the trading closed-loop process the current trend fits into, and you also know what kind of operation to perform. Over time, you may not even need to look for indicators to analyze; every standard in the process is ingrained in your muscle memory.

In a mature trading closed loop, we all become qualified assembly line executors.

I will give you a few simple examples below to facilitate your understanding.

Suppose we have a trading logic of a fluctuating type and have established a technical closed loop.

4. Human Nature and the Closed Loop of Trends

Human nature is the driving force behind the formation of a regular closed loop in the market.

Buffett once said: "When others are greedy, I am fearful; when others are fearful, I am greedy." In fact, the characteristics of fear and greed in human nature are also within a closed loop.

In a bull market, the greed drives the stock prices, with all large positive candlesticks rising. When the market reaches its peak and a reversal candlestick appears, the emotion of fear is amplified, and the market quickly falls with large candlesticks, forming an alternating closed loop of trends.In the volatile market following a significant downturn, the sentiment is continuously brewing. Traders' expectations for a bull market are growing stronger, and the potential greed within is stirring. The market slowly starts to move, brewing for another bull market.

However, it always begins with greed and ends with fear, entering another cycle.

The fluctuations in the financial market are driven by human nature in a closed-loop pattern, only the patterns of human nature are not as strong and easy to grasp as the seasonal changes.

As a mature trader, understanding human nature is the most basic thing. On the basis of the closed-loop of human nature, establishing a closed-loop of technical methods can capture more of one's own market trends.

As Livermore said: "There is nothing new on Wall Street." Human nature remains unchanged, and the logic of alternating trends and oscillations in market trends will continue to operate, and the closed-loop of technical methods can also continue to operate.

Therefore, human nature is the driving force behind market trends.

Understanding the regularity of the closed-loop of human nature, and then using the technical closed-loop to capture the market.

We can understand the market trend as an assembly line, which is advancing with a fixed operating pattern, but this pattern is too large, with too many details, and we cannot take them all in.

So what we need to do is to find what we can do in this assembly line, that is, to find a segment that conforms to our trading rules, is stable, fixed, and has a probability of market trends.

Hold on to big profits when there is a reversal, and stop losses in time when there is no reversal. In the long run, profits can be greater than losses, and this is a successful trade.A simple truth is that farmers who till the land earn more in good years and less in bad years, or even suffer losses. In the long run, farming is a positive return activity that can support a family, so the land can continue to be cultivated.

Our trading is in a similar situation. In the continuous and alternating operation of the closed loop, some processes will be profitable, and some will be at a loss. However, if it is profitable in the long term, it can continue.

The principle of trading is not complicated, and don't think too highly of trading. Imagine ourselves as the farmer who cultivates the land, or the worker in front of the assembly line, day after day, year after year. Thinking this way will make us more at ease.

Trading is much more complex and difficult than farming.

If trading is like farming, many farmers can achieve a comfortable life, but few traders can make a profit. Why is that?

Because farmers and traders have different requirements for risk and return, and high returns inevitably come with high difficulty.

A farmer invests 100,000 yuan in agricultural tools, fertilizers, and pesticides for farming, possibly only seeking a return of 20,000 yuan. A trader invests 100,000 yuan in trading, but wants to pursue double or even several times the return through trading.

A farmer would never think of doubling the income from farming in one year, but the vast majority of traders are eager for quick success.

Money does not come out of nowhere. The premise for traders to achieve high returns is that they must bear high risks, achieve high technical difficulty, and withstand high psychological pressure. If you want more, you have to pay more and do things that others can't do. At this level, our world still makes sense.

Therefore, risk and return are also a closed loop, and high risk may lead to high returns.The logic behind profitable trading is not hard to grasp, but achieving a technical closed loop is by no means simple. Moreover, if one pursues high returns, the difficulty will be even greater, so everyone should be mentally prepared.