In the year of the Dragon, let's start with a very important topic about the correction of the trading system.
The market changes too fast, and many things that have never happened before can occur.
Many retail investors' trading systems have collapsed, resulting in huge losses at the beginning of 2024.
Indeed, many things that have never happened before have occurred for the first time.
For example, the sharp drop in micro-cap stocks, with a decline of more than 45% in just over ten days, which was unprecedented.
For example, the CSI 300 has now had four consecutive years of negative performance for the first time in history, with the previous longest being only two years.
For example, the new energy and photovoltaic indices have closed with negative performance for seven consecutive quarters, which is also the first time in history.
Too many things that were once thought impossible have happened, which is a great test for a trading system.
Even quantitative trading has not escaped the disaster, with some quantitative private funds turning profits into losses in just a few days, and facing the embarrassing situation of liquidation.
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This fully illustrates that many trading models have already become unsuitable in the current market.Some individual investors may still be immersed in the joy of the second half of 2023, speculating in stocks with erratic movements, chasing leading stocks, and making significant profits.
In January 2024, they were given a solid blow to the head.
The market always reaps the once big winners quietly and unexpectedly.
Therefore, for many individual investors, it is very important to correct their trading systems.
Moreover, this matter is somewhat urgent.
It is clear that the market style has shifted from ultra-short-term games to medium and long-term historical layouts.
No matter how the market changes, the essence will not change, which is to buy cheap stocks and then sell them at high prices.
However, there is still a need for a lot of correction in terms of technology and trading execution.
After the market style changes, how individual investors should respond has become the current issue to be solved.Here are a few key points to discuss and share with everyone.
Firstly, whether the stop-loss mechanism is well-established.
If your trading system encounters problems and incurs significant losses over a period of time.
The first thing to do is to check whether your stop-loss mechanism has made a mistake.
Because if there is a good stop-loss pattern, it is unlikely to incur significant losses in a short period of time.
There are times when you must sell decisively, otherwise, the entire stop-loss system is invalid.
Although it is true that you may be deceived many times, there is nothing that can be done about it.
You cannot think that because the price has fallen too much, the break is a lure, and not the funds being shipped out.
It is actually very dangerous to deal with the market's decline with a fluke mentality, and it is necessary to remain rational.
The stop-loss mechanism is not just as simple as the stop-loss ratio.More often, the strategy for setting stop losses is adjusted based on the frequency of stop losses to avoid frequent stop losses in a short period.
Once a large number of stop loss actions occur in a short period, the trading system is undoubtedly very unsuccessful.
Secondly, whether the stock selection idea has changed.
The failure of the trading system is not only due to the problem with the stop loss mechanism.
More often, it is because the stock selection idea is no longer in line with the times.
For example, the previous market style was obviously biased towards small-cap stocks, and now it has long turned to the direction of large blue-chip stocks.
This major style change is actually a shift in the overall market capital.
Therefore, the stock selection idea actually needs to be greatly adjusted, otherwise, it will go further and further on the wrong path.
The idea of stock selection is nothing more than technical stock selection and fundamental stock selection.
When the trading system collapses, it is essential to improve the fundamental stock selection, not the technical stock selection.Many people have fallen into a misconception, thinking that technical failures are due to problems with technical patterns.
But the reality is that after the fundamentals change, all technical aspects may fail.
On the road to a big drop, only trend trading that does not buy stocks is truly an effective stock selection idea, and the rest is nonsense.
At this stage, the idea of stock selection based on fundamentals needs to change, especially the focus of the fundamentals is even more critical.
Third, whether the buying point needs to be changed.
The so-called change in the buying point is actually mainly for the chasing group, whether it is necessary to calm down.
When a set of trading strategies fails and there is a significant loss, the biggest problem must be on the buying point.
There is no need to blame the stock selection for the problem.
Many times, it is the timing of buying and selling that is wrong, not the stock itself.
Even the worst stocks will have rising times, and at a certain stage, they may even rebound greatly due to a plunge.In essence, there is no absolute distinction between good and bad stocks; there is only the difference between being cheap and expensive.
When you catch a very good buying point, you will understand the mystery of trading.
Some retail investors who specialize in catching oversold rebounds and chasing the falling and killing the rising, if done well, often make a lot of money.
Moreover, buying the dip instead of the rise can effectively obtain cheap chips, which is also the core of trading.
Fourthly, whether the position allocation mechanism needs to be optimized.
The matter of position management, seemingly a cliché, is actually of extraordinary value.
Some investors like to go all-in on stocks, which is actually very risky.
The position allocation mechanism is mainly used to combat risk and avoid major unexpected situations.
Generally speaking, when you have a significant loss and the trading system collapses, you need to find a way to adjust in position.
The position allocation mechanism must be optimized.When the returns from diversified investments fall short of expectations, it is important to know how to consolidate positions and select quality stocks.
When concentrated investments suffer significant losses, it is necessary to diversify positions appropriately to reduce risk.
An excellent trading system also requires controlling the overall scale of positions.
For example, by using valuation methods to determine the current position of the market, it facilitates the arrangement of position allocation management to ensure a safety factor.
Fifth, whether the profit-taking mode needs to be adjusted.
The last point is the adjustment of the profit-taking mode.
This is also very important, directly determining the profit.
In a bull market, the focus is on holding on tightly, but in a bear market, it becomes a game of stockpiling, and it is essential to choose a good price to sell.
In a bear market, taking an elevator has become the most common situation, because the market is less controllable, and funds can withdraw at any time.
If you still operate the market according to the expectations of a bull market, it is easy to get stuck in the middle of a bear market, and it is often the case that after buying, the price rises first, and then falls.The concept of taking profit itself is about earning money within one's own understanding. How to balance the losses due to insufficient knowledge has become the key issue.
The trading system itself requires stability, and any unstable profit-taking model must be adjusted.
The establishment of a trading system is actually just the initial part. Once you get involved, it is normal for the entire system to face constant adjustments and repairs.
Some trading systems may be completely eliminated by the market, which is also very normal.
The market is ruthless, and it is necessary to be fully prepared to start over.
In this market, you can only adapt to it, and there is no situation where it will be subdued by you. Going with the trend is the way out.
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