Last week, I wrote 12 questions about technical indicators, and everyone found them very informative. Today, I will continue to organize 11 questions about trading systems.

There are only two ways to achieve trading profits: one is to do fundamental analysis, and the other is to do technical analysis.

Fundamental analysis involves deeper and broader professional knowledge, which is difficult for ordinary traders to get started with. Technical analysis is clearer and more explicit, with clear standards, and the threshold for entry is relatively lower.

Having a trading system is an essential process for doing technical analysis and the only way to achieve profits.

Today, these 11 questions are the ones that people usually ask me the most. I will answer them all at once. If you have any other questions about trading systems, you can also leave a comment below the article, and we can continue to organize them next time.

1. What is a trading system?

A trading system is to set standards for every one of your trading actions. For example, when a chart is placed in front of us, when should we go long? When should we go short? At what position should we stop loss in the trade? At what position should we take profit? How much position should we use in the trade? Do we need to adjust the stop loss and take profit positions according to the changes in the market? All of these have clear standards in the trading system.

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1: The K-line breaks through the moving average upwards, confirming the direction as bullish.

2: The K-line re-enters when it pulls back to the moving average.3: Stop loss at the low point of the candlestick.

4: Set a fixed 3:1 reward-to-risk ratio for taking profit.

This is the most basic trading system. In practice, the details of the trading system will be more complex, but the basic logic remains the same.

2. Is it necessary to have a trading system?

Yes, it is.

A trading system is the standard for trading behavior.

To make it easier to understand, let's use an analogy. In life, our actions are constrained by morals and laws, which allows society to function in an orderly manner. Without these constraints, if everyone acted according to their own preferences without any limits, society would be in chaos.

Trading is the same. In the world of trading, without the constraints of trading rules, if we indulge our human nature, it can lead to severe losses. The trading system here is like the law in our trading world.

If the trading system can have clear rules and consistent standards, then our trading results can be statistically analyzed, which is beneficial for guiding the next trading actions.

Still, using the logic of the trading system where the candlestick crosses the moving average and enters on the retest of the moving average. According to the trading rules, there are a total of 5 trading opportunities in the chart, with 3 profitable trades and 2 trades stopped out for losses.In the trading of this market trend, our trading system is effective, and we can assume that the trading system has the ability to make a profit, and we can continue to persist.

Here, I would like to emphasize that the trading system needs to have statistical data of at least more than 200 times to test its profitability. The cases I mentioned are just for illustrative purposes, and the cases are not practical, so everyone should be aware of this.

Having a trading system, you will know what you are going to do next, and you can test the effectiveness of this trading system, and then you can execute it consistently, so a trading system is definitely necessary.

3. How can you have your own trading system?

We imagine the trading system as a car. A car needs an engine, gearbox, tires, and other basic structures, and almost all the basic structures of cars are the same.

All trading systems also have this basic structure, such as confirming direction, entry and exit, stop loss and profit-taking, and capital management, and the structure of all trading systems is the same.

Although their basic structure is the same, the details can be different.

For example, some traders use moving averages to judge the trend, some traders use trend lines to judge the trend, and some traders judge the trend based on support and resistance positions, etc. These differences in details create the differences of each trading system, but never forget that our only purpose is to make a profit.

The basic framework of the trading system: confirming direction, entry and exit, stop loss and profit-taking, capital management.

We use different technical indicators, according to the basic framework of the trading system to formulate trading standards, to get a prototype of the trading system.Translate the following text into English:

Take this prototype to a backtesting software or a simulated trading platform for testing and refinement, ultimately obtaining a profitable trading system.

4. How long does it take to build a trading system?

There is no one-size-fits-all answer to this question.

Ever since I had the idea of building a trading system, it took me about two years from the initial construction to the backtesting and perfecting of the trading system. Along the way, I took some detours, but overall, I didn't make any major mistakes.

Since I started teaching trading systems, I have been in contact with hundreds of students. From their learning process, even those who are more talented and diligent also need about half a year to complete the construction of a trading system.

In fact, a trading system is not complicated, but every detail needs to be verified through backtesting, and the details need to work in harmony with each other. The entire process is very tedious and particularly tests the trader's patience.

Take the example of the Shanghai Gold 2212 contract. When setting a stop loss in the trading system, you can choose to set it at position A or B. Which position is better? Which one yields higher profits? Backtesting statistics are needed.

The same goes for taking profit. Is it better to set it at A (risk-reward ratio of 2:1) or B (risk-reward ratio of 3:1)?

1: Everyone should pay attention to the methods of setting stop loss and taking profit. There are not only A and B two options; using different indicators can lead to C, D, E, and many other solutions, all of which need to be compared and filtered. The workload will double.

2: The details of a trading system are not limited to stop loss and taking profit. For example, different methods of confirming trends and their matching with stop loss and taking profit, different entry methods and their matching with stop loss and taking profit, and even details like trailing stop loss, such as closing positions with floating profits, all need to be refined and backtested.

In this way, everyone can understand that the workload involved in building and testing a trading system is enormous. And without comparing the details of the trading system, it is impossible to derive a refined and feasible trading system.There exists a harsh reality among traders: more than 90% of them have never established and perfected a verified, profitable trading system; most still rely on their instincts.

5. Is it difficult to establish a trading system?

It is, and it isn't.

Firstly, the difficulty lies in the traders' unwillingness to accept imperfection and their pursuit of perfection.

Many traders have a misguided understanding of the profitability of financial markets. Most start trading without a deep comprehension of it.

Influenced by the wealth myths of financial market profits online, as well as the human nature of seeking benefits and avoiding harm, and the pursuit of perfection, they all want to build a perfect trading system, hoping for a high success rate, a high profit margin, and the ability to capture all market trends.

However, the reality of the trading world is cruel; various trading systems have their own profitable and declining cycles, and indicators have their own characteristics, making it impossible to achieve the ideal state traders envision.

Many do not recognize this reality and continue to strive and fail in their pursuit of perfection.

Here, I would like to advise everyone that all trading systems are ordinary. Accepting the imperfections of a trading system is the starting point for establishing a trading system and the beginning of a correct trading philosophy.

Secondly, the difficulty lies in the traders' laziness.As mentioned above, establishing and perfecting a trading system requires a significant amount of work, which is a great test of a trader's patience and control over details. There are very few people who can truly calm down, diligently analyze data, review trades, and gradually improve their trading system. Most people have a short-lived enthusiasm.

Therefore, if you have just a little more patience, a little more effort, and persistence than others, you have surpassed the vast majority. Moreover, it is not uncommon for people to test their trading systems with real money during the process of refining them, which is not ideal. It is better to pause trading first, otherwise, it may affect your objective judgment of the trading system.

6. What are the criteria for a good trading system?

1: Simplicity, clear standards, and well-defined details.

A simple trading system allows traders to make quick judgments in complex trend charts and carry out trading operations swiftly. Clear standards and well-defined details eliminate areas of subjective judgment. All trading actions follow a set of rules, adhering to the trading system's guidelines, ensuring consistency in trading, which can relieve psychological pressure and guarantee the execution of trades.

2: Balanced distribution of profits and losses, without extreme fluctuations.

A trading system with extreme fluctuations can cause significant psychological stress. Particularly, consecutive losses can severely affect a trader's confidence, induce fear, and result in a loss of execution power, leading to trading failures. A trading system must pursue a balance between the success rate and the profit-to-loss ratio to ensure its executability.3: Match with one's own personality.

As mentioned earlier, a trading system is like a car; different people prefer different styles of cars. Different trading systems also have their characteristics, such as the frequency of trading, the length of holding positions, and so on. The characteristics of a trading system should match one's own personality traits in order to achieve better results with less effort.

7. What to do if you have a trading system but can't execute it?

Situation 1: After the trading system is established, has it been backtested to verify its effectiveness? Are you fully aware of the details such as the profitability, success rate, drawdown period, and drawdown amplitude of the trading system?

If these tasks have not been done and you do not have a good understanding of the details of the trading system, you will doubt the system during the execution process, and may even develop a fear, ultimately making it impossible to execute.

Before executing the trading system, a lot of backtesting work must be done to understand all the details of the trading system, which will build confidence and enable execution.

Situation 2: The details of the trading system do not match one's personality or daily routine.

For example, a part-time trader may have a high-frequency trading system, but they are also quite busy with their regular job, making it difficult to balance work and the execution of the trading system. For instance, a trader with a quick temper may have chosen a long-term trading system, which tests their patience greatly during the holding period, and makes execution even more challenging.

It is important to fully consider one's own personality traits and specific circumstances to establish a trading system that suits oneself.

Situation 3: Overly heavy position sizing.

(The translation ends here as the original text also ends at this point.)Heavy positions can lead to significant psychological fluctuations, whether they result in profits or losses. When making substantial profits, people tend to become blindly optimistic, and more aggressive traders may even alter their trading systems to increase their positions. On the other hand, when incurring significant losses, a fear of trading can develop, leading to reluctance to open new positions or an inability to hold positions until the profit target is reached, resulting in the premature closure of positions and missing out on potential gains. It is essential to establish a reasonable position ratio based on the details of the trading system and one's own psychological tolerance, and to strictly adhere to it.

8. How are trading systems categorized?

Trading systems can be classified from two different perspectives.

1: Trend-following trading systems and range-bound trading systems.

The basic definition of market trends is divided into trending markets and range-bound markets. Technical indicators can also be broadly categorized into trend-following indicators and range-bound indicators. Consequently, trading systems can be divided into trend-following trading systems and range-bound trading systems. Trend-following trading systems generate profits in trending markets and incur losses in range-bound markets; range-bound trading systems, on the other hand, make profits in range-bound markets and suffer losses in trending markets.

Note: It is impossible for a single trading system to be effective in all market conditions; there must be a trade-off.

2: Intraday, short-term, medium-term, and long-term classifications.

Intraday trading systems focus on capturing gains within the same trading day, often with a focus on short-term price movements and quick execution. Short-term trading systems typically operate over a few days to a couple of weeks, aiming to capitalize on short-term market trends. Medium-term trading systems have a horizon of several weeks to a few months, looking to take advantage of intermediate market movements. Long-term trading systems span several months to years, focusing on long-term market trends and fundamental analysis. Each of these categories has its own set of strategies and risk management techniques tailored to the time frame of the trades.Intraday, short-term, medium-term, and long-term classifications correspond to different K-line cycles in trading. On trading software, there are usually 8 to 10 different time periods available. The larger the K-line cycle you trade, the longer the holding period, and using the same trading method, the larger the trading cycle, the lower the trading frequency.

Moreover, there is no absolute standard for the classification of intraday, short-term, medium-term, and long-term. Different traders have different understandings. I will roughly categorize them for your reference.

Intraday: Close positions within the day, trading on 1-minute and 5-minute K-line charts.

Short-term: Hold positions for one or two days, trading on 15-minute, 30-minute, and 1-hour K-line charts.

Medium-term: Hold positions for about a week, trading on 4-hour and daily K-line charts.

Long-term: Hold positions for about a month, trading on daily and weekly K-line charts.

(The above classification is not an absolute standard. Using the same cycle K-line for trading, but different methods of closing positions in the trading system will result in different holding times.)

9. How to choose trading systems for intraday, short-term, medium-term, and long-term?

1: Choose based on your own daily routine.

For example: If you are a part-time trader and the intensity of your daytime job is high, with not much time to monitor the market, you can choose intraday trading during the night session. Focus your energy on trading for these few hours, close positions, and it will not affect your work the next day.Part-time trading, with not too intense daytime work, can be done without missing out on monitoring the market, thus allowing for short-term or medium-term trading operations.

2: Choose based on your own personality traits.

People with a quick temper opt for intraday or short-term trading, with a short holding period and less patience required. Those with a slow temper can choose medium-term or long-term trading, having enough patience to hold positions.

There is no absolute standard for choosing, and everyone can try it out for themselves before making a decision. For example, by using a demo account to try out a trading system, one can feel the frequency of operations and the time period of holding positions, and whether it matches their daily routine and personality traits, before making a choice.

However, part-time traders should grasp one overall principle: trading should not affect work, do not get carried away, and prioritize work.

10, What if the trading system fails?

1: Any trading system can fail.

Market trends are divided into two categories: oscillation and trend. Trading systems are also classified according to trends and oscillations. A trend-based trading system will fail in an oscillating market, and an oscillation-based trading system will fail in a trending market, which we have mentioned before.

2: Be well prepared for the failure of the trading system.

By reviewing past trades, understand how long the trading system's failure period is, which is what we refer to as the decay cycle, and know how much the loss will be when the trading system fails, to have a clear understanding.At the same time, we must use reasonable positions to control the overall drawdown during the ineffective phase, preventing the trading system from the risk of blowing up, and keeping the drawdown within a psychologically bearable range, so as not to affect execution due to significant drawdowns.

3: Endure the loneliness.

The failure of the trading system and the resulting drawdowns are the greatest test for traders, and this is also the dividing line between profitable traders and those who suffer losses.

Mature traders can maintain consistency in their trading even during the ineffective phase of the trading system, and they can welcome profits when the market conditions align. Failed traders, on the other hand, are indecisive during the ineffective phase of the trading system, constantly changing their strategies, and when the profitable market conditions finally arrive, they miss out on profits due to a lack of execution.

11. Can you operate multiple trading systems simultaneously?

It is not recommended.

Many people might think that since the market conditions can be divided into consolidation and trend phases, we could have two trading systems, one to handle trends and one for consolidation, so we can cover all market conditions, right?

However, reality is not like that.

Because market trends are unpredictable, we do not know when the market will enter a consolidation phase or when it will trend. Our trading systems are designed to capture market conditions that meet our trading criteria within the vast unknown of market conditions.

The only thing we can do is to engage in trades that meet our criteria and abandon those that do not, much like sifting flour, where we can only sift out the flour that meets the standard, leaving behind the rest that does not meet the standard, and it is impossible to sift out two different qualities of flour at the same time.If we simultaneously operate multiple trading systems, the following situations may arise:

1: Different trading systems have different criteria, and executing them concurrently can lead to conflicts. For instance, if System A determines the market direction to be bullish while System B determines it to be bearish, it becomes challenging for traders to make rational judgments, which can affect execution.

2: The utilization rate of funds in the account will decrease. The total capital in our account is finite, and considering the resonance of drawdowns, it is necessary to disperse funds across different trading systems, which actually does not significantly aid in profit generation. The utilization rate of capital drops, while the workload increases, and apart from being busier, the outcome in terms of profit will not differ much.

3: Execution power will be greatly diminished. Establishing and executing a single trading system is already very difficult, and if one tries to divide attention to execute multiple systems, it becomes easy to make mistakes or miss opportunities, ultimately leading to a stressful and potentially loss-making situation.

Mastering the execution of one trading system is more than enough for us; there is no need to be overly greedy.