Strategy and Tactics in Trading
What is strategy? It is the ultimate goal of a battle, and it is the general policy not to be adjusted or changed at will. What about tactics? Tactics are methods and methods implemented to achieve strategic goals, and are tactical systems that can be adjusted according to changes in the situation.
To give an example in life, we want to travel, and deciding where to go is a strategy, so how do we get there? Take the high-speed rail? airplane? bus? It is tactics. When the weather is bad, we have to adjust our tactics, refund the plane ticket and travel by high-speed rail, and finally reach the destination.
So for traders (especially large-cycle or trend traders), the judgment of the general direction of the market is to formulate strategic goals, so how and when to intervene and a series of subsequent operations need to be solved at the tactical level.
Strategy determines whether to fight, tactics determine how to fight
Dynamically optimize the cost of holding positions -- an important tactic
Today we put aside the strategic level and talk about a concept that has not been taken seriously, that is "holding cost". Can holding costs be optimized? Yes, every time we participate in a transaction, we will form a position, and there will be a position cost line. Its importance is that the better the position cost, the higher the profit ratio of your transaction. Not only the stop loss/take profit can be dynamically adjusted in the transaction, but our holding cost can also be dynamically optimized!
So how do we dynamically optimize our holding cost in the transaction? Today I will introduce some common tactics.
The first two are easy to understand and easy to implement, and the third may need more reflection.
1. Stop Loss - I am very reluctant to use stop loss without properly understanding it at the beginning of trading. In fact, in addition to preventing large-scale losses, stop loss is an effective means to optimize the cost of entering a position, which is another important meaning of stop loss, especially for large-period swing/trend traders.
Example: We go long at 1000, stop loss at 950, and we will go long on dips when the big strategy remains unchanged, so we will go long again when the market reaches 800. Where is our holding cost at this time? 850, when the market rises above 850, we start to make a profit as a whole, what if we don’t stop loss? Our holding cost is 1000, and the market needs to return from 800 to 1000 before we can make a profit.
Due to the use of stop loss, our cost has been optimized from 1000 to 850.
2. Cover up positions on dips - a quick way to get results, but the risk of holding positions will also increase. If the risks can be systematically controlled, it is a good way to optimize the cost line. Therefore, we cannot blindly use the method of topping up positions on dips, and must cooperate with the filter conditions to implement them mechanically.
Example: We go long at 1000 and the market drops to 800. We buy another order of the same amount again. At this time, our position is doubled, and the cost of the position is optimized to the 900 line.
Legend: Covering up positions on dips must meet objective conditions, otherwise it is easy to get out of control.
Taking the auxiliary condition of the moving average as an example, we go long in the rectangular area (entry 1), and the market then starts to fall. During this period, we do not blindly cover the position, and wait for the 3 moving averages to cross upwards and carry out the action of covering the position (entry 2) to effectively filter out the decline stage. At this point, we have optimized the cost to the position of (entry 1 + entry 2)/2.
3. Lock position - Our focus today is that many EAs will use similar methods. Why is this method best implemented through EA? Because lock positions need to be used reasonably, with a series of execution conditions, as the market fluctuates Timely trigger a series of actions such as opening, locking, and closing positions.
Example: We are long at position 1000, locked at position 950, and when the market falls to 800, the locked position will be closed. At this time, without any increase in risk, the cost of long position is optimized to 850, and the market rebounds to more than 850 Your original long order starts to make a profit.
Legend of short selling: 1 short, quilt cover 2 lock position 3 close long position locked position 4 cost dynamic optimization to near the horizontal line
Explain this concept in detail
You judge that the market is going to fall today, so you find a point to short one order, and the position is successfully opened.
Stop loss plan: everyone knows it, the stop loss is set at 50 points above the price of your empty order
According to the stop loss plan, there are three situations:
Situation 1: The market has fallen smoothly according to your preset direction, ok, you have made money, as for when to close the position, I will not discuss it, anyway, you have made money
Situation 2: As soon as you open a position, the market turns and goes up, but before it reaches 50 points, it goes down again and continues to fall, and you also make money
Situation 3: Open a position, the situation goes up, more than 50 points, you lose 50 points and stop loss out
Lock order vs. stop loss:
Hang a long order 50 points above the price of the short order
Situation 1: The market falls smoothly according to your preset direction. At this time, you have made a profit. When the situation will be closed, we will not discuss it for the time being
Situation 2: As soon as you open a position, the market turns and goes up, but before it reaches 50 points, it goes down again and continues to fall, and you also make money
Situation 3: Open a position, the situation goes up, more than 50 points, the hedge order is opened, and your floating loss of 50 points is locked. At this time, there are several situations
a: When the market goes up to 80 points above the short order, you close the long order by executing the filter conditions, and the price starts to fall. When it falls to 30 points above the first short order, you start to make a profit. Note here, you locked it through the lock position The risk of 50 points, so when you close the locked position and the market drops by 50 points, your first empty order will start to make a profit
b: The market does not meet the filtering conditions, so you keep holding it, and wait for the market to give you another chance to judge (how good you are, give us another chance) and wait until the next high point, such as one after an increase of 150 or 250 points High point (multi-bull reversal signal), close the long order, just wait for the drop of 50 points, your loss will be evened out, and you will start to make a profit
c: The most unlucky thing is that your judgment is reversed, the market reverses instantly, and it rises by 1000 points, then you admit defeat and close both long and short positions at the same time, you will lose the initial 50 points, and your stop loss will be 50 points. Same.
Then compare the two plans, and you will find that in the first plan, there are 2 kinds of profits and 1 loss in 3 situations; the second plan has 5 situations, 4 kinds of profits and 1 loss.
Has our winning rate increased through a series of optimization operations? The point is, it provides you with more time/opportunities to judge the market and make corresponding adjustments again.
This tactic is like you encounter a robber in an alley, you will definitely suffer a disadvantage in fighting here, the space is narrow and there is no support (we lock the risk first), and then we lure the robber to the big horse to try to find a chance to escape (in a stronger If it still doesn’t work, then we will lead the gangsters to a place with more people to fight wits and courage (providing more time/opportunities to judge the market and make corresponding adjustments again) ).
In actual use, we can mix and match 1.2.3 at the same time, optimize the cost to the extreme and increase the chances of winning the transaction. The more layers you have in your strategy, the more difficult it is to implement it manually, so the importance of quantitative trading tools is once again reflected!
Finally, let’s talk about why foreign exchange trading is difficult to make a profit?
Regardless of operation or other external factors, I think there are two main ones that are most easily overlooked.
(1) Spread - kill short-term/frequent traders
(2) Interest - kill the position/order bearer
Because of these two factors, we retail investors are playing a game with negative expectations. In this game environment, the larger your trading volume and the longer your participation time, the more likely you will lose money. So we need a more diversified tactical/trading system to help us regain our disadvantages.
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