Detailed Explanation of the Trading System (Part One)

The reason why the trading system is called a trading system is that it is a complete trading solution.

** Everyone knows that a software operating system, such as Apple’s iOS mobile operating system, is very powerful and comprehensive. It not only comes with powerful built-in software but also supports other external software, showcasing its diverse functionalities. For example, the photography features, including various beautification tools, filters, portrait modes, and video editing capabilities, are not only comprehensive but also offer an excellent user experience. **

This is a system that almost addresses every need we can think of for mobile phones and can also solve the problems we might encounter. The city’s flood prevention is also a system. Shanghai’s flood prevention system is very good; no matter how heavy the rain is, Shanghai has almost never been flooded. However, the flood prevention in some cities in the country may be less than satisfactory.

**Actually, decades ago, Shanghai was the same. When it rained heavily, many streets would be flooded, which was very bad for the entire city and caused even greater losses for the people. Once there is a heavy rain, the business of 4S shops will suddenly improve because cars are prone to malfunction when encountering water, and at this time, insurance companies ** will suffer heavy losses due to a large number of policies. A systematic response plan has an absolute advantage over ad hoc adjustments.

A trading system that suits you is a necessary condition for successful trading. This trading system is not rigid but tailored to your own personality, with a complete trading philosophy, detailed market analysis, and specific operational plans. Winners in risky markets all have their own trading systems; therefore, finding a trading system that suits you and perfecting your trading system is something professional traders almost repeat every day throughout their lives.

3.1 What is a trading system?

What is a trading system? A trading system is a complete set of trading rules. A well-designed trading system must provide clear and specific guidelines for all relevant aspects of investment decisions. These guidelines must be objective and unique, allowing no room for different interpretations. It must align with the user’s psychology, the conditions of the investment targets, and the requirements for risk management of the capital.

The advantage of the trading system lies in its completeness and objectivity, which guarantees the repeatability of trading results. Theoretically, for any user, if the conditions of use are completely the same, then the operational results will be exactly the same. The repeatability of the system signifies the scientific nature of the method; systematic trading methods belong to scientific investment trading methods. Most investors tend to focus their decision-making on market analysis and judgment, which is biased. Successful investing requires not only correct market analysis but also proper risk management and mindset. Among these three, mentality is the most important, followed by risk management, and finally analytical skills, known as the 3M system ( Mind, Money, Market ). To put it figuratively, market analysis accounts for at most 30% of a successful trade. What is often overlooked by most traders is the decisive factor in investment behavior.

Market analysis is the premise of management. Only by starting from correct market analysis can a valuable trading system be established, and risk management can exert its maximum effectiveness. The mindset is the bridge and link between the two.

**If a person has a poor mindset, they often deviate from rigorous market analysis methods, replacing objective analysis with subjective wishes, and often forget about risk management. If traders want to earn profits steadily and continuously, they must address these two major issues: **

**(1) How to find the non-random parts in a highly random market price fluctuation; **

(2) How to effectively control one’s psychological weaknesses and ensure rational decision-making is executed. Many investors’ practices have proven that trading systems are powerful assistants for traders in both aspects mentioned above. Most beginners entering the market do not have a systematic view of the market.

Many traders unilaterally acknowledge or deny the feasibility of a trading method based on a certain understanding of the market. To determine whether a trading method is feasible, it is necessary to calculate and judge through a large amount of data statistics, and it cannot be simply judged subjectively.

**When designing our own trading system, we consider various aspects, every possible situation, as well as the judgment and evaluation methods for the trading signals that arise, which can help traders evaluate the merits and demerits of a trading method more rationally. More objectivity, less blindness. **

The trading system can also help investors effectively manage risk. Practice has shown that investors who do not use a trading system find it difficult to accurately and systematically control risk. Without the guidance of a trading system, it is challenging for investors to assess the risk involved in each trade and the impact of trading on the overall account.

The use of the trading system can clearly inform investors of the expected profit rate, expected loss amount, and expected maximum loss for each trade. These are all important parameters for investment risk management. Helping traders effectively overcome psychological weaknesses and maintain a better mindset when facing the market may be the greatest benefit of the trading system.

**The trading system makes the process of trading decisions more procedural, transparent, and rational. Traders can shift from choices dominated by emotions in a vague state to evidence-based choices, which means purely assessing the quality of signals in our trading system, as well as executing the trading strategies preset by the signals. **

The complete trading system includes:

(1) target - what to trade; (2) position——how much is held; (3) Direction - Long or Short; ( Entry Point——At what price point to trade; ) Stop Loss —— When to exit a losing trade; (Take Profit——When to exit a profitable trade; )7( Countermeasures——How to respond to emergencies; ) follow-up action——actions taken after the transaction ends.