This is a very good topic because the uncertainty and unpredictability of trends are the most fundamental logic of market trends, and it is also the only correct understanding of market trends. All trading systems should incorporate the principle of uncertainty into the design of the trading system; otherwise, serious problems will arise during the execution of the trading system, and it will not be possible to achieve trading profits.
How should we understand the design of the principle of uncertainty into the trading system? Everyone can understand it in this way: I don't know whether the market will rise or fall next (the principle of uncertainty of the trend), but I know what to do if it rises, and how to deal with it if it falls, with a clear and unique response plan. If you have achieved such a trading state, you have designed uncertainty into the trading system.
Next, I will discuss this issue from two aspects: cognition and methodology.
1: The level of cognition.
Traders must recognize the uncertainty of market trends. If there is certainty in the market, then everyone can put all their wealth into a certain opportunity, and there would be no poor people in the world.
All market trends belong to the future, and the future is unknowable, which is the most fundamental human cognition.
At this point, someone will ask: If everything is unknown, how do we still trade?
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An example will make it clear. Although you don't know if it will rain tomorrow (weather forecasts can also be wrong), you can make plans in advance and carry an umbrella at any time, so we have a way no matter how the weather changes.
Trading is the same. We can't know for sure whether it will rise or fall tomorrow, but we know what to do if it rises, and how to trade if it falls. No matter how the market goes, we have a plan to deal with it, which is turning uncertainty into certainty.
2: The level of methodology.The method of designing uncertainty into a trading system is to break down each step of the trading system, and then formulate corresponding rules based on the possible changes that may occur at each step of the trading process. For example, when entering the market in a trading system, list all the possible changes that may be encountered when the order enters the market, and formulate corresponding trading rules for each change. The goal is to ensure that no matter how things change, I know what to do.
To illustrate this with an example, let's consider a rectangle consolidation break entry, using the method of entering after the break and the candlestick closes. When entering the market after a pattern break, consider the various different scenarios that may occur after the break, which can be summarized into five possibilities:
1: If the market does not break, and the trend reverses, abandon the trade.
2: After the break, if the market moves a very small space before closing (less than 50 points), enter the order directly.
3: After the break, if the closing occurs with a movement greater than 50 points (large entry stop-loss space), wait for the market to retrace by 50% before entering. If the market retracement does not reach 50%, abandon the entry.
4: After the break, if the market quickly recovers and closes with the price back within the rectangle consolidation range, do not enter.
5: After the break, if the market quickly recovers and closes with the price already forming a reverse breakout (this is a standard fake breakout structure), enter in the opposite direction (still considering the 50-point rule for the opposite entry).
Although there are uncertain trends in a rectangle consolidation break, the changes will not exceed the above five possibilities. The trading system has clear responses to these five changes, and the rules are clear and straightforward for the trader to execute. This is how the principle of uncertainty is designed into the opening of the trading system.Our trading system's opening positions take all five possibilities into account, ensuring foolproof execution in actual trading.
After setting up the opening positions, the basic framework of the trading system, including closing positions, stop-loss, and take-profit, are all dissected separately. Corresponding rules are established for their potential scenarios. Once all possible variations of these basic frameworks have been designed with rules, at this stage, the principle of uncertainty has been methodologically incorporated into the trading system.
When you have strategies to cope with all changes in the market, the next step is to calculate and optimize probabilities. Trading becomes simpler, and execution is greatly enhanced. In fact, trading is a very simple matter; do not overcomplicate it.
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