Source: Qilehui.

According to statistics from professional investment institutions, a successful trader generally needs five years, $50,000 in tuition fees, and even if you invest time and money, the probability of success is less than 1%.

A common trap for beginners is the perfect trading syndrome. For example, a trader earns money using Method A once, then incurs consecutive losses with Method A. After careful study and observation, he discovers a better method, but abandons it due to losses. This cycle repeats, and his trading career is not a trading career, but a search for the perfect method. There should be many such people among futures traders.

I. Psychological Aspects of Trend Traders

Every trading method has corresponding psychological barriers. For trend traders, the following psychological preparations must be made:

Giving back profits is common. Letting profits run is the motto of trend traders, while profit-taking is unavoidable. After experiencing several profit-taking instances, novices often try to predict highs or lows, thus losing their positions in major trends and missing rare profit opportunities. There is no need to regret profit-taking as hindsight is always 20/20.

It is common to experience consecutive small losses. Patience and perseverance are the most important qualities for trend traders. After experiencing consecutive losses, you must patiently wait for the trend to come and stick to your principles in trading, otherwise, it's like just finishing the decoration of a luxurious restaurant but giving up on opening for business.

Willing to buy high and sell low. The winning rate of trend traders is less than 50%, as trends are not frequent, and the market is mostly trendless most of the time. 95% of the profits come from 5% of the trades.

Second, the psychology of mean reversion traders.

Mean reversion traders include arbitrage trading, hedge trading, traders using swing indicators like KDJ and RSI. They place orders when the market reaches extremes or deviates from the mean, and close positions when the market returns to the mean.

Willing to endure a large loss once to offset multiple profits. For example, shorting in an overbought market may result in a significant loss due to a sharp gap up in extreme situations, or in arbitrage, price discrepancies exceeding the historical range due to forced liquidation, etc.

Mean reversion traders have a higher winning rate.

Compared to trend traders, mean reversion traders have more free time; they can go on vacation and rest. Trend traders must persevere in trading, waiting for significant trends to emerge after experiencing consecutive losses.

Mean reversion trading is not about catching market tops and bottoms; they always try to capture the unstable parts of the market. However, if the trend continues, the unstable assumption is wrong, and positions must be closed immediately with admittance of the mistake. They must endure lower risk-reward ratios.

3. Psychological aspects of intraday trading

Intraday traders provide sufficient liquidity to the market.

There are many methods for intraday trading, including pattern trading, momentum trading, program trading, high-frequency trading, intraday arbitrage, intraday hedging, etc.

Decisiveness is the most important quality of an intraday trader. A hesitating trader often turns a losing intraday trade into an overnight one, then holds onto it, resulting in significant losses.

It must be understood that one good trade cannot make you, while one bad trade can potentially ruin your account or life.

The selection of intraday trading instruments is particularly important, as they must have sufficient liquidity and volatility. Not all instruments are suitable for intraday trading, similar to how not all ponds have fish.

Is it advisable to trade too frequently intraday? This statement clearly carries subjectivity. If there are many opportunities, why not trade more? In other words, as long as you keep trading, you will profit. Of course, this should be done in accordance with trading principles and discipline.

If your commission rate is not low enough, consider giving up intraday trading.

Discipline is the guarantee of success for day traders. Day trading is a physical activity, so it is crucial to balance work and rest. Astute day traders focus on the big picture while taking care of the details.

Flexibility is the most important aspect of day trading. Do not rigidly believe that day traders cannot hold positions overnight. For example, in a bull market, a low opening often leads to a upward trend. In this case, why not hold a successful long position overnight for a handsome profit?

Novices often end up in losses after a few trades in a day. In order to break even, they may go against their own trading principles by trading frequently. Alternatively, after making a profit in a trade, they may resist taking further action to secure their win, thus missing out on greater profit opportunities for the day.

Astute day traders never check their account equity while trading. They do not let profits and losses affect their mindset and principles. Perhaps they do not really care about profits or losses; they only care about adhering to discipline.

Most day traders have more than one computer, enabling them to spot more opportunities with their sharp eyes.

IV. Psychological Aspects of Pattern Trading

Pattern trading relies on one's judgment and experience to execute trades, in contrast to algorithmic trading which relies on computers to generate trading signals.

It requires extensive post-trading analysis, and even draws insights from fundamental analysis. It demands the quality of patience to wait for the right opportunities.

Trend-following programmatic trading will not miss any major market trends, but pattern traders may miss out. They need strong self-healing psychology, it can be said that the psychological pressure they endure is far greater than that of programmatic traders.

The flexibility of trading allows them to use loose money management methods, thus potentially gaining huge profits. For example, programmatic trading uses 20% of funds for each single variety. If it suddenly expands to 40%, the inconsistency of trading may lead to system crashes, but pattern traders may take heavy positions under certain conditions such as contraction days and profitable add-ons.

Pattern trading includes continuation patterns and reversal patterns.

V. Trading psychology based on fundamentals

Aiming to determine the future trend of the financial market, through in-depth analysis of the economy and certain data. Data here serves as the primary basis for analysis, but often cannot be the final trading decision. If data could solve problems, computers would have replaced human brains for fundamental analysis long ago. In fact, besides data, it also needs to include many intangible things that cannot be measured by data.

The essence of fundamental analysis lies in the supply and demand relationship of commodities, where scarcity leads to value. Fundamental analysis has no fixed formula, it can be said to be very subjective.

Value investing largely relies on fundamental analysis, while traditional value investing is completely based on fundamental analysis. Traditional value investors typically approach investments cautiously, similar to the way a girl gets married, with a long-term hold strategy after buying in.

Most fundamental analysts focus mainly on buying, because commodity prices will not go to zero, but have no upper limit.

Fundamental analysts mainly focus on long-term trades. They are confident and firm in their fundamental trades.

6. Psychological Aspects of Failed Trades

Traders who do not set stop-loss orders cannot afford losses. They lack discipline and often trade based on news.

They are often influenced by the trend of the overseas market and suffer losses. For example, if the overseas market declines and a downward gap has already absorbed the impact, blindly following the gap is not advisable. If the trend is upward, it is a buying opportunity. In fact, more than 60% of the time during the day, the trend is opposite to the previous day's overseas market trend.

They cannot afford to lose money, even more so, they cannot afford to lose confidence. They always look for a foolproof method to make money every time. They either always bearish or bullish on a certain variety.

7. Proper Financial Management

(1) Two Simple Financial Management Methods

1. Fixed Ratio Rule (Suitable for algorithmic trading)

Trader A uses 0.5 million to trade futures, involving three different varieties, with each variety having a 10% opening position, totaling 30%, and utilizing 0.15 million in funds. After trading for a period, the funds reached 0.6 million, still maintaining 10% for each variety, totaling 30%, but utilizing 0.18 million in funds. If the trader incurs losses and the capital drops to 0.4 million, the allocation remains the same at 10% for each variety, totaling 30%, but the funds have decreased to 0.12 million. The recalculations are necessary each time an opening position is initiated.

The 2-2% rule (suitable for pattern trading, day trading, and the like).

The rule states not to exceed a loss of 2% of the total capital on each trade. If a trader engages in futures trading with 0.5 million, the 2% would be 0.01 million, meaning each trade's loss must be controlled within 0.01 million. Let's consider an example related to zinc below:

If we plan to buy at 18135 and stop loss at 17930, then the loss in a trade would be:

(18135-17930) * 5 = 1025 yuan

Dividing 0.01 million by 1025 yuan gives 9.3. Therefore, in this trade, we can only place orders for 9 lots to ensure that the loss remains within 2% of the total capital when incurring losses.

Even if you experience continuous losses 20 times, you still have 0.34 million left. However, this is highly unlikely because the so-called pattern trading involves trading with high-probability patterns.

(2) Arcane Heavyweight Trading

Let's start with an example:

Taking the four-week rule program trading as an example, buy when breaking above the highest point of the previous 20 days, and close position when breaking below the lowest point of the previous 10 days, and vice versa.

With a capital of 0.5 million, from April 1994 to present, using 10% opening profit for rubbers resulted in a 2416% return, while using 20% opening profit led to a 27649% return.

We can see that after doubling the opening ratio, the profit increased by 11 times.

This is the magic of compound interest. A 10% proportion means that after making money, 10% of the profit is added to the position.

But if there is another trader with the same capital of 0.5 million, who adopts the following money management:

That is, 10% of the deposit, which is 0.05 million (the remaining 0.45 million for reserve funds), with each full position trade, which means reinvesting profits by 100%.

Advantages: greater returns, very high capital utilization rate.

Disadvantages: Large drawdowns, need opportunities for intervention.

8. Correct Trading Philosophy

A trading method that matches your personality and consistently trades.

Discipline is the premise of success.

There is no perfect trading method, each method has fatal psychological obstacles and challenging periods.

The market is dynamic, trading systems have timeliness.

Varieties are not eternal, liquidity and trends come from capital intervention.

Success is not about using special trading methods, but a mental rebirth, a high degree of unity between personality and method.

Editor/Lambor