If you find yourself in the midst of trading and suddenly realize that making more money in the market relies more on "position management" and "risk control," then congratulations, it indicates that your trading is on the path to profitability.

Many people, regardless of how many years they have been trading, are still in search of a trading method that can consistently yield huge profits, but ultimately, they come to naught. When you let go of the illusion of a magical method and delve into some ordinary methods that you once looked down upon, coupled with position management and risk control, you will discover that even simple methods can generate profits.

Some time ago, a friend complained to me that he had built many different trading systems, but found that none of them performed satisfactorily. Either they ended up with gains and losses that didn't amount to much, or the profits were not high enough, making all the trials feel like a waste. He said he had incorporated all the technical methods he could think of into the trading systems, but still couldn't produce the desired results.

I told him: If you feel that you have reached a dead end in terms of technical skills and it's hard to break through, then look for a breakthrough in position management.

Advertisement

Firstly, we must understand a principle: market trends oscillate between consolidation and trends, much like an electrocardiogram, which must fluctuate up and down and will not continue to move upwards or downwards indefinitely. Many people, not paying attention to position management and risk control, will gradually lose their principal in this back-and-forth market.

At this point, we can use position management strategies to reduce losses and make profits.

Since the capital curve fluctuates cyclically with periods of decline and upward consolidation, we can start executing the trading system with a very small position. When faced with uncooperative market conditions, trades will continue to lose, and the curve will take a significant downward turn. At this time, the capital curve is likely to shift from a decline to an ascent. This is when we can switch to a normal position, make a profit, and then stop, waiting for the next opportunity when the capital curve heads downward.

The line in the chart represents a trend of horizontal consolidation. It is difficult to make a profit by continuously trading within it. Change your mindset: only when the capital curve has declined to a relatively low position, then start to intervene with a normal position. At other times, just wait. There are four opportunities to intervene in the chart, and after each intervention, profits will rise. A segment of the market that originally had no profit has now yielded considerable profits.

How to determine this relative low point and the position to take profits?

Just do one thing: after perfecting the trading system standards, conduct a series of retrospective statistics. Pull out the capital curve of this trading system over the years and study its changes.For instance, according to statistics, over the course of more than a decade, this trading system on average experiences a rebound in the market after each drawdown of about 15%. Thus, we can consider this 15% as the standard for drawdown. Start by trading with a light position during the losing period, and then gradually increase to a normal position when the loss reaches the 15% drawdown level.

The same principle applies to setting a profit-taking position, which is determined based on historical statistical data. In trading, one should not always aim to capture the entire fish, from head to tail, trying to buy at the lowest point and sell at the highest. In reality, as long as one captures the meaty middle part of the fish, it is already sufficiently rewarding.

In this way, we can continuously generate profits during a market trend, minimize losses during the losing phase, and maximize gains during the winning phase.

In economics, there is a theory of economic fluctuation cycles, which consists of four stages: recovery, prosperity, decline, and depression, alternating in a cyclical pattern. We should enter the market during the recovery phase, exit during the prosperity phase, and wait for the arrival of a new recovery phase during the decline and depression phases. This theory is similar to the position management operation we discussed earlier.

Risk control is particularly important in this trading method.

We choose to start getting involved when the average drawdown of the account occurs, so after we enter a normal position, the capital curve may still decline further, such as by 20% or more. At this time, we need to prepare for risk control in advance.

Moreover, this risk control is not to be implemented after the decline phase, but to set a strategy before any trading operation, which can prevent encountering a black swan market situation that leads to substantial losses.

Therefore, the more you engage in trading, the more you will realize that trading is a game of position management and risk control. Since market trends are relatively similar, whoever manages their positions well, maintains a good mindset, has strong execution, and can control risks to cut losses, will have no worries and find trading becoming increasingly smooth.