The nine levels of trading
The first level of trading, I call it a “sponge.”
This stage is characterized by frantically absorbing and studying various theories, knowledge, and principles.
From Dow's theory to Gann's theory, from K-line charts to curve charts, from financial analysis to industry theory, from macro theory to trading psychology.
Anyway, everything related to trading is insanely absorbed.
This is the only way for everyone to invest and grow. It is a process of laying the foundation.
This is because the more solid the foundation is laid, the further we can go in the future.
Like a sponge, it is not difficult to absorb, it is difficult to remove coarse essence, it is difficult to digest, and it is difficult to blend in.
The second level of trading, I call the “lost person.”
The characteristic of this stage is: Dear, I understand the reason, but why is TMD not profitable?
The characteristics of the complex human physiological system are bound to be one thing, that is, there is a long circuit from understanding a certain principle to execution.
There are many things that can interfere with and damage this circuit.
It's like the Red Army marching 25,000-mile long march. In the middle, they had to climb snowy mountains and cross meadows, endure freezing and starvation, and they also had to make all kinds of maneuvers with the enemy, and die nine lives.
The difficulty of this circuit, from understanding the truth to putting it into place, is no less difficult than the 25,000-mile long march.
Because along the way, you'll encounter an extremely powerful enemy, your emotions. Like greed and fear. The power of emotion is so great; its power is 100 times greater than your power of reason.
That's not the scariest.
The scariest thing is that this emotion is also a part of you.
For example, when it's time to stop loss, you just can't bear to stop loss; you just hesitate to take action. This unwilling part is also a part of you. It's not an external enemy, it's within your flesh and blood.
No matter how powerful a person is, can he beat himself?
So why did the ancients say it was so difficult to combine knowledge with action. This is where the difficulty lies.
Many people get lost in this long circuit for the rest of their lives.
The third level of trading, I call it “ruthless.”
Since emotions always interfere with us, let's just let ourselves be ruthless.
As I said at the beginning of the Sunflower Collection, if you want to practice your magic skills, this is what it means.
When making decisions, try not to involve emotions.
For example, when you stop loss, practice being ruthless the moment your hand hits the ground.
In fact, this stage has already entered into the practice of “good care” referred to in the King Kong Sutra.
Focus only on the present and not be bothered by the success or failure of past transactions. Only then can you be “ruthless.”
This stage is also usually the beginning of the path to profit.
The fourth level of trading is what I call “Miyoshi Students.”
This stage is characterized by discipline, especially discipline.
The ruthless stage shows that you actually still have emotions; you just work hard and forcibly block your emotions out of the door.
But when you simply enforce trading discipline, things get simpler.
You'll make it a habit to make a trading plan for the next day after the market closes every day.
The next day, no matter what happens, you will follow this plan.
No matter what the cost, you are happy to act with discipline.
At this stage, you are beginning to understand how to treat trading results and trading processes separately. This is a very important step.
The right trading process is 100 times more important than the correct outcome of a trade.
Because the results of certain transactions are correct, they are short-term; in the long run, the impact on your investment career is minimal.
And the correct trading process proves that you have developed good habits. This is an important thing that lasts a long time and can stay with you for the rest of your life.
The fifth level of trading, I call it “internalization.”
You don't even need to write a trading plan every day (for 99.99% of people, the principal still strongly recommends writing one).
Because of all the discipline and execution of iron, these things have been internalized.
It's like a skilled driver who has internalized when to step on the gas and when to brake.
Your heart has formed a trading system, and you subconsciously strictly follow this system to execute trades.
At this point, you're actually already a quantitative trader. Or call them half-quantized traders.
Many experts in subjective trading are actually at this level.
The sixth level of trading is what I call “nothing wins or does anything”.
Once your system is set up, you find that you can even stop watching the market.
You can write your trading strategy into computer code and let the computer read the market and execute orders for you.
As a monitor, you only need to take a look once in a while.
At this stage, you discover that the less you do, the more you earn.
Because your inaction is a prerequisite for ensuring that the system works.
If you act too much and interfere too much with the system, it will have a negative effect.
At this stage, you need to control your desire to subjectively interfere with the system.
The seventh level of trading, I call the “mathematician.”
Coming here means you're ready to dive into quantitative trading and have your own strategies, models, and practices.
As a quantitative trader, the first and most important step is to create a beautiful backtesting capital curve.
When you have a strategic idea, you need to write it into computer code, then what?
It's not about starting actual trading right away, but putting it into real historical market data for backtesting.
For example, you thought of a strategy to buy when the 5-day EMA crosses the 20-day EMA and sell when the 5-day EMA crosses the 20-day EMA.
You wrote computer code, and then you backtested the five years of daily data on the Shanghai Composite Index from 2010 to 2015 to do historical backtesting to see if this strategy actually makes money.
Turns out, the results aren't as good as you might have imagined.
Then you'll start doing something called parameter optimization.
Since the 5-day SMA and 20-day SMA don't work well enough, how about switching to the 10-day SMA and the 30-day SMA?
You'll notice that there are so many parameters to choose from. At this point, the benefits of computers come into play. They can help you complete a large number of calculations and find optimal solutions in a large number of parameters.
This process is mathematically called fitting.
Essentially, it is about finding the parameters that can best adapt to historical market conditions through extensive calculations.
You can then get some pretty simulated funding curves.
This process is a necessary path for all quantitative traders, and it is also a very important stage.
Because the better you can fit the historical market situation, the more beautiful the capital curve you make, it shows that your basic skills are very solid and that you have a very deep understanding of the market.
It shows that you have the ability to optimally combine various technical indicators.
These abilities are all invaluable.
The eighth level of trading is what I call “trying not to be a good tailor.”
In the previous stage of the fitting process, you may use a large number of filters, a large number of conditions, etc., to make the strategy perform well enough in historical market conditions.
But suddenly, one day, you discover a problem. The more parameters of a strategy are used, the worse the strategy's adaptability to future market conditions will probably be.
It's like being a tailor making clothes. Based on your current figure, he carefully measured a lot of data and then made clothes that fit perfectly. You are very beautiful to wear.
But the problem is that the more appropriate clothes are at this moment, the less adaptable you are to adapt to possible future changes in your figure.
If you suddenly become fat or thin in the future, you won't be able to wear this dress.
However, the future of the stock market is uncertain; this stock is likely to gain weight or lose weight one day in the future.
If you make your clothes fit too well, the less suited it will be for the future.
When you realize this, you've entered a whole new phase, which I call subtraction.
You'd rather make the clothes look less appropriate and less presentable at the moment. You need to make it more adaptable to future changes.
This process was very painful.
Just imagine how painful it is for a good tailor to let him take the initiative to make clothes that don't fit that well.
Similarly, one of your strategies can run very beautifully in historical markets, have stable earnings, and backtest a very small capital curve. At this point, you have to do subtraction, which may make this funding curve pothole and become less beautiful.
When you get to this point, you'll be able to understand this pain.
The ninth level of trading, I call it “the road to simplicity.”
The phrase “from the road to simplicity is to choose” comes from “Confidence Ming” by the three grandparents of Zen Buddhism. I really love that phrase.
After you've tried thousands of tricks, tried countless advanced tricks, and used countless Nobel equations, you finally discovered that the world is actually simple.
Things that can remain effective over a long period of time are simple and simple things.
This stage is characterized by frantically absorbing and studying various theories, knowledge, and principles.
From Dow's theory to Gann's theory, from K-line charts to curve charts, from financial analysis to industry theory, from macro theory to trading psychology.
Anyway, everything related to trading is insanely absorbed.
This is the only way for everyone to invest and grow. It is a process of laying the foundation.
This is because the more solid the foundation is laid, the further we can go in the future.
Like a sponge, it is not difficult to absorb, it is difficult to remove coarse essence, it is difficult to digest, and it is difficult to blend in.
The second level of trading, I call the “lost person.”
The characteristic of this stage is: Dear, I understand the reason, but why is TMD not profitable?
The characteristics of the complex human physiological system are bound to be one thing, that is, there is a long circuit from understanding a certain principle to execution.
There are many things that can interfere with and damage this circuit.
It's like the Red Army marching 25,000-mile long march. In the middle, they had to climb snowy mountains and cross meadows, endure freezing and starvation, and they also had to make all kinds of maneuvers with the enemy, and die nine lives.
The difficulty of this circuit, from understanding the truth to putting it into place, is no less difficult than the 25,000-mile long march.
Because along the way, you'll encounter an extremely powerful enemy, your emotions. Like greed and fear. The power of emotion is so great; its power is 100 times greater than your power of reason.
That's not the scariest.
The scariest thing is that this emotion is also a part of you.
For example, when it's time to stop loss, you just can't bear to stop loss; you just hesitate to take action. This unwilling part is also a part of you. It's not an external enemy, it's within your flesh and blood.
No matter how powerful a person is, can he beat himself?
So why did the ancients say it was so difficult to combine knowledge with action. This is where the difficulty lies.
Many people get lost in this long circuit for the rest of their lives.
The third level of trading, I call it “ruthless.”
Since emotions always interfere with us, let's just let ourselves be ruthless.
As I said at the beginning of the Sunflower Collection, if you want to practice your magic skills, this is what it means.
When making decisions, try not to involve emotions.
For example, when you stop loss, practice being ruthless the moment your hand hits the ground.
In fact, this stage has already entered into the practice of “good care” referred to in the King Kong Sutra.
Focus only on the present and not be bothered by the success or failure of past transactions. Only then can you be “ruthless.”
This stage is also usually the beginning of the path to profit.
The fourth level of trading is what I call “Miyoshi Students.”
This stage is characterized by discipline, especially discipline.
The ruthless stage shows that you actually still have emotions; you just work hard and forcibly block your emotions out of the door.
But when you simply enforce trading discipline, things get simpler.
You'll make it a habit to make a trading plan for the next day after the market closes every day.
The next day, no matter what happens, you will follow this plan.
No matter what the cost, you are happy to act with discipline.
At this stage, you are beginning to understand how to treat trading results and trading processes separately. This is a very important step.
The right trading process is 100 times more important than the correct outcome of a trade.
Because the results of certain transactions are correct, they are short-term; in the long run, the impact on your investment career is minimal.
And the correct trading process proves that you have developed good habits. This is an important thing that lasts a long time and can stay with you for the rest of your life.
The fifth level of trading, I call it “internalization.”
You don't even need to write a trading plan every day (for 99.99% of people, the principal still strongly recommends writing one).
Because of all the discipline and execution of iron, these things have been internalized.
It's like a skilled driver who has internalized when to step on the gas and when to brake.
Your heart has formed a trading system, and you subconsciously strictly follow this system to execute trades.
At this point, you're actually already a quantitative trader. Or call them half-quantized traders.
Many experts in subjective trading are actually at this level.
The sixth level of trading is what I call “nothing wins or does anything”.
Once your system is set up, you find that you can even stop watching the market.
You can write your trading strategy into computer code and let the computer read the market and execute orders for you.
As a monitor, you only need to take a look once in a while.
At this stage, you discover that the less you do, the more you earn.
Because your inaction is a prerequisite for ensuring that the system works.
If you act too much and interfere too much with the system, it will have a negative effect.
At this stage, you need to control your desire to subjectively interfere with the system.
The seventh level of trading, I call the “mathematician.”
Coming here means you're ready to dive into quantitative trading and have your own strategies, models, and practices.
As a quantitative trader, the first and most important step is to create a beautiful backtesting capital curve.
When you have a strategic idea, you need to write it into computer code, then what?
It's not about starting actual trading right away, but putting it into real historical market data for backtesting.
For example, you thought of a strategy to buy when the 5-day EMA crosses the 20-day EMA and sell when the 5-day EMA crosses the 20-day EMA.
You wrote computer code, and then you backtested the five years of daily data on the Shanghai Composite Index from 2010 to 2015 to do historical backtesting to see if this strategy actually makes money.
Turns out, the results aren't as good as you might have imagined.
Then you'll start doing something called parameter optimization.
Since the 5-day SMA and 20-day SMA don't work well enough, how about switching to the 10-day SMA and the 30-day SMA?
You'll notice that there are so many parameters to choose from. At this point, the benefits of computers come into play. They can help you complete a large number of calculations and find optimal solutions in a large number of parameters.
This process is mathematically called fitting.
Essentially, it is about finding the parameters that can best adapt to historical market conditions through extensive calculations.
You can then get some pretty simulated funding curves.
This process is a necessary path for all quantitative traders, and it is also a very important stage.
Because the better you can fit the historical market situation, the more beautiful the capital curve you make, it shows that your basic skills are very solid and that you have a very deep understanding of the market.
It shows that you have the ability to optimally combine various technical indicators.
These abilities are all invaluable.
The eighth level of trading is what I call “trying not to be a good tailor.”
In the previous stage of the fitting process, you may use a large number of filters, a large number of conditions, etc., to make the strategy perform well enough in historical market conditions.
But suddenly, one day, you discover a problem. The more parameters of a strategy are used, the worse the strategy's adaptability to future market conditions will probably be.
It's like being a tailor making clothes. Based on your current figure, he carefully measured a lot of data and then made clothes that fit perfectly. You are very beautiful to wear.
But the problem is that the more appropriate clothes are at this moment, the less adaptable you are to adapt to possible future changes in your figure.
If you suddenly become fat or thin in the future, you won't be able to wear this dress.
However, the future of the stock market is uncertain; this stock is likely to gain weight or lose weight one day in the future.
If you make your clothes fit too well, the less suited it will be for the future.
When you realize this, you've entered a whole new phase, which I call subtraction.
You'd rather make the clothes look less appropriate and less presentable at the moment. You need to make it more adaptable to future changes.
This process was very painful.
Just imagine how painful it is for a good tailor to let him take the initiative to make clothes that don't fit that well.
Similarly, one of your strategies can run very beautifully in historical markets, have stable earnings, and backtest a very small capital curve. At this point, you have to do subtraction, which may make this funding curve pothole and become less beautiful.
When you get to this point, you'll be able to understand this pain.
The ninth level of trading, I call it “the road to simplicity.”
The phrase “from the road to simplicity is to choose” comes from “Confidence Ming” by the three grandparents of Zen Buddhism. I really love that phrase.
After you've tried thousands of tricks, tried countless advanced tricks, and used countless Nobel equations, you finally discovered that the world is actually simple.
Things that can remain effective over a long period of time are simple and simple things.
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