Everyone has a different understanding of trading systems. Some people prefer complexity, with a fondness for flashy multi-period, multi-indicator systems. Others advocate for simplicity, believing that simplicity is the key to success. Some prefer purely mechanical trading systems, while others rely on subjective judgment.

I myself have experienced both significant losses and stable profits, and I have a deep understanding of what failure feels like, as well as the fortunate experience of what it's like to consistently make money. I cannot speak for everyone, so today I will share from my own experiences about the three core aspects of a trading system that I believe are the most important, and which have determined my trading outcomes. I hope this can be helpful to you.

Core 1: Simplicity is the Ultimate Sophistication.

Believe it or not, if you've been trading, you've probably heard this phrase so often that it might feel cliché. But if a concept is frequently mentioned, it means there's truth to it.

Many people think that a trading system is something very complex, but in reality, it's just a system composed of technical indicators. This system provides a technical standard to guide all our actions in trading, such as using a certain indicator to identify the trend direction, finding entry and exit points, and setting stop-loss and take-profit levels.

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Some might think that this must be difficult, right? Is there some magical indicator or complex combination of indicators that can accurately predict the market?

About ten years ago, I basically tested all the indicators available on the market and found that the effectiveness of the indicators is roughly the same. For example, if you want to identify a trend, you can use moving averages, Bollinger Bands, MACD, or trend lines, because the only function of an indicator is to measure the market; it does not have the ability to predict, and nothing has the ability to predict.

The so-called "simplicity is the ultimate sophistication" means that we need to simplify our thinking and ideas, and simplify our trading system. Technical indicators are just the standards for your trading operations, and the ultimate profit still depends on the overall probability of profit of the trading system.

Some people, when they are losing money, feel that it's because they haven't found a magical method, so their strategies become more and more complex, and their understanding of the trading system becomes more and more chaotic, eventually getting stuck in this mental quagmire.

Therefore, we should pursue simple, easy-to-execute trading strategies, and focus only on a few types of products, a category of market conditions. This way, trading will not only be relaxed but also profitable.Core 2: Profit and Loss from the Same Source.

Another overused term, the word "trade" originally implies the exchange of goods, which refers to the buying and selling of commodities. Later, in the financial markets, it evolved into a process of exchanging risk for profit. Since there is risk involved, there will inevitably be times of loss. We must aim to exchange small losses for large profits, which is the concept of profit and loss originating from the same source.

It is important to note that losses are an inevitable part of trading. Many people have an extreme aversion to losses and cannot accept the slightest loss of principal or profit in trading. This can lead to not cutting losses when necessary and hesitating to open positions when it is appropriate, ultimately turning small losses into large ones and missing out on opportunities for profit.

In fact, we can simply view trading as running a business. Running a business requires a certain amount of capital and also entails the risk of failure and potential loss of all investment. Therefore, short-term losses are not always significant; the key is whether we can make a profit in the end.

A trading system is the foundation for achieving the concept of profit and loss from the same source. The reason why trading systems are frequently mentioned is that their role is to quantify all trading actions and outcomes, allowing us to know how much we lose and how much we earn, thereby optimizing the profit and loss ratio to achieve eventual profitability.

For example, when trading trend reversals at tops and bottoms, our trading system needs to achieve "cutting losses in time during false breakouts and holding onto large profits during true breakouts." By consistently trading this pattern of top and bottom reversals, the overall profit exceeds the losses, which is a successful trading system and thus realizes the concept of profit and loss from the same source in trading.

Core 3: Better to Make Small Profits Than Suffer Large Losses.

I have told many people that a key to achieving significant profits in trading is to trade with a light position. As long as we can control our greed and prefer small profits over large losses, many people can actually achieve profitability.The execution power in trading is the foundation for achieving profits, and trading psychology determines the execution power within trading. The weight of the position directly affects our emotional fluctuations. Therefore, to ensure execution power, we must ensure the stability of our mindset. Reducing the position size can greatly stabilize our mindset.

When you reduce your position size and start making profits, although the amount may not be as exciting, the profits in your account continue to accumulate. Your emotions will be positive, and even if there are losses, they will not fundamentally harm your position. This allows you to continue doing it steadily and stably.

If your position is heavy, a loss can feel like losing half your life. In that case, your subsequent trades will definitely be cautious and hesitant, and emotionally, you will be overly concerned with gains and losses. In the event of consecutive significant losses, it is very possible for a person to lose their rationality and ultimately collapse completely.

Therefore, reducing the position size can solve 90% of the psychological issues, so why not do it?

Good trading skills are the basis for making profits, but having the correct perception is even more important, after all, perception leads to action.