The Essence and Construction of Trading Systems

The trading system is a complete set of operational rules, similar to a conditioned reflex mechanism, which takes corresponding actions when specific signals appear. It includes a series of comprehensive trading rules such as entry, exit, stop-loss, and take-profit.

However, there are some misunderstandings about trading systems. Some believe that simply having a trading system guarantees profits, others think that one needs to find a better system to achieve excess returns, and some believe in the existence of a magical system that ensures profits without losses. These views are all open to discussion.

In fact, there is no trading system in the world that can guarantee stable profits forever. Even with an excellent system, strong execution is required to achieve profitability. Moreover, a good trading system is not universally applicable; everyone needs to find a system that suits themselves.

It is important to correctly understand the role of a trading system. It is similar to military guiding principles; while it cannot guarantee victory in every battle, it can avoid catastrophic defeats and preserve opportunities. The trading system belongs to the strategic level, operational thinking and strategies belong to the campaign level, while specific trading actions are at the tactical level.

The key metric for evaluating a trading system is the "profit-loss ratio," which is the average profit amount divided by the average loss amount. An ideal profit-loss ratio should be no less than 2, with 3 or above considered passing, and 5 or above regarded as excellent. It is recommended that everyone calculate the profit-loss ratio of the trading system they have been using for a long time to assess its effectiveness.

Before designing a trading system, it is necessary to clarify investment objectives, expected returns, and risk tolerance. A comprehensive system should include the following elements:

1. Cycle Assessment: Understand the market trend and determine the current cycle.
2. Operational Thinking: Determine basic strategies, such as short-term or long-term holding
3. Select Coins: Filter Potential Coins
4. Timing: Determine the best buying and selling opportunities.
5. Trading Rules: Establish Entry and Exit Conditions
6. Capital Management: Reasonable Allocation of Funds
7. Risk Control: Set stop-loss and other risk management measures

Cycle judgment is fundamental and can make operations more targeted. Choosing currency pairs is especially important for large funds, and factors such as liquidity, themes, and fundamentals need to be considered. Timing and trading rules must flexibly respond to different market conditions, but buying should be based on technical entry points. Capital management includes profit protection, position opening strategies, etc., and leverage issues also need to be considered. Risk control is an important means to ensure trading safety.

The core of the trading system lies in providing clear operational signals to avoid arbitrary trading. It can be a simple moving average strategy or a complex mathematical model. For ordinary traders, the key is to find an efficient system rather than excessively pursuing simplicity or complexity.

The Granville Eight Principles is a classic moving average trading system that includes four buy and four sell rules. It generates trading signals based on the trends of moving averages and price breakouts, making it a simple and practical entry-level system. However, in actual application, it needs to be adjusted and optimized according to specific market conditions.