In order to survive in the foreign exchange market in the long term, investors may need to have three conditions, the first is the level of capital management and risk control, the second is the level of technical analysis and basic analysis, and the last is the trading strategy and trading mentality.
FW Rongyu financial Xiaobian believes that one of these three is indispensable.
Basic analysis is mainly to predict the general direction of the market trend, while technical analysis is mainly to tell investors the specific time to enter and exit.
A high level of basic and technical analysis is clearly beneficial to the long-term survival of investors in the market.
If you compare it to money management and risk control, it’s a tactical issue.
However, the topic of today’s Xiaobian is to introduce strategic issues.
Introduce how to effectively manage funds and control risks.
Fund management and risk control is one of the fundamentals that investors can establish themselves in the market for a long time.
The question I get a lot when I talk to the average beginner is: Is there a way to do it all?
Can you find an efficient entry and exit position?
Which currency can I buy?
It’s rare to hear them ask, how much margin should you use on a given trade?
If you’re wrong, how do you cut your losses properly?
In recent years, there has been a lofty saying widely spread in the investment circle, which is called “investment is the realization of cognition”.
The more knowledgeable a person is, the better their investment performance will be.
Well, that sounds so plausible that it’s almost impossible to argue with it.
But unfortunately, a lot of what sounds reasonable is actually chicken soup.
The so-called chicken soup, is when you listen to the good sense, when the entrance is sweet and delicious, but essentially no nutrition things.
It doesn’t teach you how to upgrade yourself in practice, it doesn’t tell you how to integrate knowing and doing, and even the method itself is very difficult to integrate knowing and doing.
I wrote a post not long ago about how there is still a long way between analytics and trading.
A reader left me a comment on the official account. He further pointed out that a lot of seemingly deep thinking may be idle, unhelpful or even harmful to trading.
The reader’s argument, right or wrong, is at least the result of a lot of thought.
Today, I will continue to discuss this topic in depth.
Over tea with my team, I said, Why is it that so few people are able to invest and make a steady profit over the long term?
As the saying goes: seven losses, two draws and one win, the percentage of the final profit may be less than 10%.
And that includes a lot of smart people who can’t make a profit.
A central reason is that the “cause and effect map” of success in the investment industry (a concept coined by Turing Award winner Judea Pearl) is unique.
In my opinion, investment success requires the fit of three structures, one is called cognitive structure, one is called trading structure, and one is called psychological structure.
You can’t have one without the other, so let me expand on that.
First, cognitive structure.
What we normally call intelligence, depth of knowledge and so on, all fall into this category.
Cognitive structure refers to a person’s logical ability, rational ability, ability to analyze problems in depth, the ability to see the rules and so on.
Depth of perception is important, of course, but it would be wrong to say that investing is simply the realization of perception.
Investment is a manifestation of the combination of cognitive structure, transaction structure and psychological structure, rather than a mere realization of cognition.
In other words, no matter how good your cognition is, no matter how good your IQ is, no matter how good your logic is, no matter how good your research is, you still only have a third of the ingredients for investment success.
It’s like opening the door to investment success with three locks, and you only have the key to one of them. Can you say you are already successful?
Let’s look at the second structure — the transaction structure.
It’s what we call a trading system and the system itself is a kind of structure.
There are two important points when it comes to deal structure.
First of all, something is better than nothing.
Whether your trading system is good or not is a matter of quantity, not quality.
If you don’t have a trading system, it’s like a man going into battle without armor, basically dead.
The second element is that the trading system must be closed.
A lot of people have a trading system that looks like it has all the right elements — open positions, close positions, stop gains, stop losses — but just having all the right elements doesn’t necessarily create a closed loop.
A true closed-loop trading system can manage both downside risk (the risk of a bear pullback) and upside risk (the risk of a bull run).
In fact, on this point, we have suffered.
Our previous system managed the downside risk fairly well, the bear market retracement was well controlled, but the upside risk was not well managed.
For example, in the first quarter of this year A shares blowout market, the system reaction is insufficient, resulting in insufficient income.
Now, of course, we’ve closed the loop better with iterative upgrades.
So is your understanding deep enough and the trading system closed to mean that the investment will succeed?
Sorry, it’s still not.
Another thing that’s often overlooked, but also extremely important, is the mental structure.
Suppose someone showed you a system. The historical money curve was beautiful. The net worth went all the way to new highs.
Can you make money by giving this system to you, please?
You might say, what’s so hard about that, why don’t you just do it?
Unfortunately, the truth is not so simple, I can tell you clearly, other people’s money system to your hands may not make money.
Because the trading system doesn’t necessarily match your mental structure.
When the system is making money, everyone is happy when the wind is good.
But in any system there will be times when things don’t go well, there will be times when they pull back, and there will be times when they suffer for relatively long periods of time.
And that’s when you start to wonder, is the system broken?
Especially if it has a maximum pullback, you will be more panicked and likely to give up halfway.
This is what I always say, even if you have a wonderful sword, it may not work well.
Only man and sword together.
You can only use the trading system if it grows out of your knowledge, out of your mindset, out of your experience, out of your extensive testing.
Only after this process of grinding, the system will gradually match with your personality and mentality, and gradually become one.
Without this process, the most beautiful system is also someone else, you can not use it well.
The above detailed analysis of three structures, namely cognitive structure, transaction structure and psychological structure.
Now, what is the probability that one person has all three of these structures, and they just fit together?
So let’s say that a neutral probability, where there’s a 50% chance that a person will have one of these structures, and there’s a 50% chance that this structure will match the other structure, what’s the probability that these three structures will match exactly?
So 50% times 50 times 50% is equal to 12.5%.
So you can imagine why it’s so unlikely that you’ll make money over the long term.
Of course, the above assumption is not rigorous, the initial assumption of 50% probability, as you work hard, as you upgrade your cognition, as you refine your mind, as you grow in experience, this probability can increase.
So for individuals with the ability to evolve, the actual probability of success is probably higher than 12.5%.
But for a large sample of people, the percentage that ultimately achieves long-term success is estimated to be somewhere around that number.
Bottom line: Just as anyone has the opportunity to make a profit in this market over a sustained period of time, so do opportunities to lose money in this market over a sustained period of time, even for a fairly experienced investor.
There are many investors due to the lack of basic money management and risk control concepts, muddled in a short time out of the market.
In fact, a simple fund management and risk control is enough to greatly extend its life cycle, so for beginners, its importance is far more than technical analysis and basic analysis.
It can be said that without good awareness and means of capital management and risk control, the chance of long-term survival in this market is zero.
