Friends often come to me with their own set of trading strategies or ideas, asking if they are feasible. Each time I take a look, I furrow my brow because I find that everyone's ideas are quite fragmented. They have taken a segment of the market where they have done particularly well and naturally assume that this strategy must work.

In reality, a complete trading strategy, or a qualified trading system, needs to consider various factors. Otherwise, you will find that your trading strategy works sometimes but not others. You do well in one segment, only to lose money in the next, which can be very frustrating.

So today, in this article, I will systematically explain how to determine whether your trading system is viable. I will discuss three aspects: the completeness of your trading system, its profitability, and its executability. After reading this article, you will be able to re-evaluate your trading strategy.

The article is quite lengthy, so I recommend bookmarking it for later reading. If you find it helpful, please give the article a like as a token of appreciation.

1. Is your trading system complete?

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This is similar to building a house. If you don't lay a foundation and start pouring the ground beam or directly start building walls, the house will eventually collapse; it's just a matter of time.

The trading system follows the same principle. If we want it to run well and steadily, every step in building our trading system needs to be solid and reliable.

Many friends can judge the market correctly, but they don't know where to enter. After hesitating and entering, they don't know where to take profits or cut losses. As a result, they fail to hold onto the profits they should have taken, and the orders they should have cut their losses on end up blowing up their accounts.This involves the integrity of the trading system. How can you determine whether your trading system is complete or not?

It's simple: you can ask yourself, do you have clear criteria for every action you take during trading? Do you need to make decisions on the spot? If there is any hesitation in the answer, it indicates that your trading strategy is not complete.

The overall trading framework is as follows:

1. Confirm the direction of the trend

2. Entry point

3. Stop-loss and take-profit points

4. Capital management model

I will now elaborate on these four points of the framework in detail.

1. Confirm the direction of the trend.

Confirming the direction of the trend means that we establish our technical criteria and have an expected judgment of the current market direction. This is the first step in the trading system.This technical standard will be very clear and explicit, and it will be fixed and unified. Moreover, it is important to note that we do not always have directional expectations for the market. When the market does not conform to our confirmed direction, this is considered to be without direction, and we need to wait patiently.

2. Entry points.

We also need to establish our own technical standards to confirm the entry points. After you have confirmed the direction, you cannot enter the market immediately because the market may also go against it. At this time, we need to consider the issue of stop loss, the issue of profit and loss ratio, so every point in this trading system is closely related, and none can be omitted.

3. Stop loss and take profit points.

After the order enters the market, the first thing we need to do is to set the stop loss point, so that once the market goes against it, we can control the loss very well. The take profit point should also be set as soon as possible because it will affect the overall profit and loss ratio of our trading system.

4. Capital management model.

Capital management is very important for the trading system, and it can even be said to be the key to profit.

The position we use each time, the setting of the profit and loss ratio, and the control of the drawdown all need to be in accordance with unified standards. Because once the position is unreasonable, even if your system itself can make money, you will also lose money due to the problem of the position.

At the same time, the proportion of the position used directly determines how much money the trading system can make, and the drawdown and profit and loss ratio will also determine the stability of your trading mentality, which is very important.

When you don't have so much money, you grit your teeth and buy a luxury car, so you drive every day with fear, for fear of bumping and touching. But if you change to an ordinary car, you can drive comfortably and without worry, and you won't feel heartache when you bump into it. We should think clearly, is it the car that drives us, or do we drive the car?Building a trading system follows the same principle: an extremely luxurious and seemingly overly complex trading strategy may lead to losses because you cannot execute it. However, a simple and unpretentious strategy that aligns with your human nature may allow you to execute it for the long term. You need to understand this truth: are you aiming to make money or just showing off? I believe everyone can figure this out.

The four framework structures of a trading system I mentioned are indispensable. You can assess for yourself which part is missing and fill in the gaps to ensure that the trading system runs smoothly.

2. Can your trading system generate profits?

Many people wonder about this issue. Is there really anyone who doesn't know if their trading system can make a profit and yet risks their hard-earned money in real combat? I can responsibly say: there are many.

Many people often ask me, "I keep losing money, but I don't know where the problem lies. I feel that this trading system is very powerful; can I use it directly? I've had a lot of stop losses recently; how should I set them? Can I set a 3:1 profit-to-loss ratio, and will this operation make money?"

At this point, I would ask, "Have you tested your trading strategy? Do you know if your strategy can generate profits in the long term? How many stop losses can it withstand during the worst period? What is the longest holding period? What is the annual profit rate?"

I only asked these simple questions, but basically, no one can provide complete answers.

Trading has no barriers to entry. Many people get on the train before buying the ticket, and as a result, they end up losing money without knowing where the problem lies.

So, how can you know if your trading system can generate profits?

It's simple: there are many useful tools available on the market, such as various backtesting software with historical market data from the past few decades. Trading software also includes simulation tools that replicate real market conditions 1:1, all of which can be used to test the profitability of your trading system.Some may inquire, is historical data accurate?

Firstly, the world of trading is inherently random, uncertain, and volatile. According to the law of large numbers, the long-term stability of the average of random events must encompass inevitability. As long as the sample size of the tests is large enough, the frequency of event occurrences will tend towards a stable value.

In layman's terms, the fluctuations of candlestick charts must have regularity because behind the charts are people, and while everything else may change, human nature remains constant. We seek patterns in the volatility of candlestick charts to design a strategy, leveraging the advantage of probabilities to secure the profits we deserve. That's the principle.

Therefore, if our trading system can achieve profitability in the long-term historical market data, it is highly likely to do so in future market conditions. At least my own trading system has proven this point. I have backtested the trading data of various instruments over several decades before going into actual combat. Although it is difficult to achieve windfall profits, obtaining a certain level of profit is not a problem.

Here are two points to note when backtesting:

(1) The trading system for backtesting must be clearly defined, well-categorized, and objectively unique. If the details of the trading system are not objective and clear, you will have to introduce subjective judgments during the execution process. Once subjectivity is involved, the trading data becomes inaccurate.

(2) The magnitude of backtesting must be sufficient. According to statistical principles, the larger the sample size, the closer it is to the truth. Your trading system should be backtested at least three to five hundred times to confirm a general outcome.

Is that all after completing the framework of the trading system and backtesting to derive a profitable trading system? Not at all, let's continue further.

3. The executability of the trading system is crucial.

I often see that some people, in pursuit of greater profits, set extremely high reward-to-risk ratios, test them in backtesting software, and achieve profitability. However, once they enter the actual market, they suffer significant losses.As I mentioned earlier, if you don't have money, driving a Ferrari feels like holding a hot potato, but driving a Volkswagen feels very comfortable. Only when the car matches our own situation can we drive it for a long time.

A profitable trading system is certainly important, but you also need to be able to execute it in order to actually realize the profits.

Let me give you an example: if you design a trading system with a 7:1 reward-to-risk ratio, the success rate might only be 20%. This means that out of 100 trades, 80 of them could be wrong and result in losses. In practice, don't even talk about 80 times; you might get nervous after just three consecutive losses. This indicates that the trading system is completely unsuitable for you, or for any human being.

Regarding executability, you can refer to these three aspects to make adjustments:

1. The frequency of your trading system should be in sync with your daily routine.

For instance, some trading systems offer five trading opportunities a day, which might require you to focus intently on the market.

From observing the market, opening a position, setting a stop loss, setting a take profit, and even adjusting the stop loss, to closing positions in batches, etc., you might need to operate five or six times for a single order. If you make five trades a day, you'll need to operate the software thirty to forty times, which means you'll have to be glued to your computer all day, which is very draining.

If you're already busy with work and your attention is also occupied by trading, there's a high chance you won't do well in either area.

At this point, many people start considering full-time trading. Here's a reminder: if you haven't achieved a stable profit record for three to five years, just keep working. A stable income is extremely helpful for your trading mentality, so don't entertain any fanciful ideas.

At this time, if you adjust the frequency of your trading system to once every two or three days, and after placing an order, you only need to check once or twice a day, then such a frequency would be very appropriate.So, the frequency of trading should not be too high. Some people believe that more trades will lead to more profits, which is sheer nonsense. It's just an excuse for their itchy hands. The appropriate frequency and a stable mental state are extremely important.

2. The trading system needs to match one's personality.

Everyone has a different personality, which is why sometimes I help my students to fine-tune their trading systems, including the frequency of trades, types of assets, and holding periods, to fit their own trading habits.

Some people have a slow temperament and are suited to longer holding periods and lower trading frequencies. This approach prevents them from being flustered and ensures they can hold onto their profits. Others are impatient and have a low tolerance for waiting, so they might prefer to increase the frequency and shorten the holding periods to avoid the discomfort of restlessness.

Trading definitely requires a certain level of self-analysis. One must be clear about their personality and the greatest weaknesses in their nature in order to adapt to their own human nature as much as possible in trading and avoid potential risks.

3. When assessing your risk tolerance, consider your own capacity to withstand losses first.

Many people think they can withstand at least a 50% drawdown, but in reality, I've observed that most people start to feel extremely uncomfortable when they lose 20% of their principal.

It might not seem significant, but let me give you an example. Suppose your principal is 500,000, a 50% loss would be 250,000, and a 20% loss would be 100,000. Losing 100,000 at once, wouldn't that hurt?

Let me give you another example. Many people think they like trend-line trading because the profits from a single trade can be substantial and very satisfying. However, if you have a trend-line trading system, you might be wrong 20 times in a row before finally achieving a significant profit.

Many people might think that being wrong 20 times in a row doesn't seem like much, but in actual combat, after being wrong three times, you might start to doubt. After eight consecutive losses, your hands might start to shake. After ten losses, you might start questioning life itself. How do you endure until the 20th time?So, never overestimate your own capacity to withstand losses.

When assessing your risk tolerance, consider your own capacity to bear losses first. Generally speaking, our true risk tolerance is only 30% of what we perceive it to be, that's right, just 30%.

In other words, if you think you can withstand a 50% drawdown, in reality, your maximum tolerance might only be 15%.

I once had a student who couldn't make a profit no matter what he did. After reviewing his positions, I gave him a suggestion: reduce your position to within 30% of the original. He incredulously replied: "Won't that mean no more money to be made?" I said: "Try it first."

What happened next? For the first half of the year, he followed my advice on position sizing, not only did he make a profit, but he also became less anxious. When I asked him after another half year, he said it was the first year he had made a profit in so many years of trading.

Later on, I suggested he gradually increased his position by 20%, and now he has stabilized at this position without any changes. He said something very classic: "Now I understand, the money that can be put into my pocket is the real money."

So, we would rather underestimate our risk tolerance than take risks in pursuit of high profits. If you feel particularly uncomfortable or anxious about trading, you can consider reducing your position, stabilize the profit first, and then gradually increase your position, and if you feel uncomfortable again, step back one level.

In fact, trading is not difficult, it's just a bit tedious, but to do anything well in this world, you must have the patience to study and refine it thoroughly.

Impatience and greed are the biggest obstacles to your profits. I believe everyone will re-evaluate their own trading strategies, and I wish everyone smooth trading!