A friend once shared with me an impressive trading system that could double profits in just two months. The logic behind the trading strategy is as follows: use the EMA90 moving average as the support and resistance level. After the market tests the 90-day moving average and forms a reversal candlestick pattern, a position is opened. Long positions are taken when the market falls from above the moving average, and short positions are taken when the market tests the moving average from below.

If the order is taken profitably, wait for the market to test the moving average again and continue to open positions. If the order is at a floating loss, and the market forms another reversal candlestick pattern, add to the position. By averaging the price through additional positions, wait for the market to reverse and then take profits.

The position management rules are as follows: for an account with $10,000, the first position is opened with 0.5 lots, the second addition is also 0.5 lots, the third addition is 1 lot, and subsequent additions follow this pattern.

The chart shows the 1-hour candlestick chart of the Euro. The trading period was from early April to early June, over two months, with a total of 26 trades, almost all of which were profitable. The success rate of the trades was very high. The initial capital was $10,000, and the profit for the two months was $10,136, doubling the initial investment.

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At first glance, this trading system indeed has something to it, with a not too heavy position and a high success rate, continuously profitable within two months. Could this be the legendary trading holy grail?

Later, I continued to test further. At the beginning of June, the account had just doubled, and on June 9th, I continued with a long trade. However, the market suddenly plummeted, falling nearly 3,000 points. I added to the position three times, but the account still blew up, resulting in a loss of $10,071.After more than two months of hard-earned profits, all were lost and the position was blown out within a week.

The biggest problem with this strategy is that it completely abandons risk control; such a high success rate is achieved at the cost of high risk.

When the market cooperates, it can generate a very considerable profit, but if it encounters the wrong market, a blowout can happen in an instant, and you have no control over it.

This kind of system is referred to as "divine" in the eyes of many people, but in my eyes, it is just a defective product with inherent flaws because it cannot survive in the market in the long term.

So, what qualifies as a top-tier trading system?

1. A trading system that places extreme emphasis on risk control is considered a top-tier system.

How should our trading system manage risk? In fact, it comes down to these three points.

(1) Risk Quantification

Risk quantification refers to quantifying the maximum potential loss for each trade.

For example, if a single trade loses 1% of the principal, with a 100,000 capital, and if the stop-loss range is 50 points, then the position size would be 2 contracts, with clear entry and stop-loss prices. Each stop-loss is clear and explicit, making the risk controllable.(2) Risk Diversification

Allocating funds across different types of assets is akin to putting eggs in different baskets. If an extreme market condition arises in a particular asset, such as a sudden gap or a black swan event in the fundamentals, our diversified risk means that the losses will be limited.

(3) Pursuing Limited Profits

Every trading system has its profit ceiling, for example, an annualized return of 50%. There will be some over-smart individuals who might think, if the annualized return can be this high, I could double my position and my profits would become 100%, or quadruple my position and my profits would become 200%.

The reality is that when you quadruple your position, if you encounter an uncooperative decline period, your losses will also quadruple. While everyone is excited about profits, no one can withstand losses. You might not be able to endure this period of losses, and your account could be wiped out, never reaching the moment of profit.

Even if you don't get wiped out, when losses are severe, the psychological pressure can become immense. Can you guarantee not to make mistakes under such pressure? A single mistake could lead to a catastrophic outcome.

Therefore, risk control is something ingrained in us, and it must never be let go at any time.

The trading market is indeed a vast gold mine with endless money to be made, but we only have two hands and can only take a limited amount of money. Never be overly greedy.

2. A top-tier trading system must also have the ability to generate consistent and stable profits.

Why do we engage in trading? Of course, it's to make money.Risk control is paramount, but profitability is also crucial, and the profitability here does not refer to short-term gains but to stable and long-lasting profits.

How can we achieve stable and enduring profitability?

Firstly, the process of making profits should be balanced and not excessively challenge human nature.

Let's illustrate this issue with a trading record from a market trend.

We use the break of a trend line as the standard for trading; we go long when the market breaks above the trend line and go short when it breaks below. We follow the trend with the trend line, continue trading, reverse from short to long after a stop loss on a short position, and reverse from long to short after a stop loss on a long position.

This trading method is very simple, with a single time period and only one indicator, making it easy to grasp. Let's look at the trading results of this method over a period of time.

The chart shows an hourly candlestick chart of the Euro to US Dollar exchange rate. The trading period was from early June to early August, with a total of 21 trades conducted, 11 losses, and 10 wins, with a success rate close to 50%. The initial capital was 10,000, with a profit of 2,281, achieving a 22% profit over two months.

Whether looking at the trading success rate or the level of profit, this trading strategy performed very well.

However, upon a deeper analysis of the process of trading profits, you find that the trading results are actually very uneven. Among the first 13 orders, only 2 were profitable, while 11 were losses, with a net loss close to 900, and the losses lasted for half a month.

Imagine a half-month of continuous losses, 11 stop losses, only 2 profits, and a 9% drawdown in account equity. Such adverse trading conditions are a great test of human nature, and the mindset can easily collapse. In this situation, it is difficult for most people to remain rational, and sometimes that instinctive fear and impatience can easily distort your trading, possibly before you even reach the stage of profitability.What if we adjust the criteria of this strategy and then look at the trading results again? We use trend lines and inflection points to confirm the direction, enter the market on a pullback, set the stop loss at the starting point of the market, and exit in a trend-following manner. The chart is a 1-hour candlestick chart of the Euro against the US Dollar. The trading time is the same as in the picture above, from early June to early August. A total of 12 trades were made, with 5 losses and 7 wins. The initial capital was 10,000, with a profit of 1,877, a two-month profit of 18%. Although slightly lower than the profit of the previous strategy, the feeling during the execution process is completely different.

Firstly, the trading frequency has decreased, and the number of errors and consecutive errors in trading has also decreased. Moreover, in the trading results, the distribution of wins and losses is more even, with no consecutive stop-loss trades. The capital curve is rising slowly, which is very in line with human nature.

The entire profit-making process has a minimal impact on the mentality, not generating particularly large fear emotions, and thus not affecting the execution. When the profit levels are similar, the choice should be very clear.

Human nature is the biggest problem in trading, and a good mentality determines whether you can continue on the trading path. Therefore, when designing a trading system, we should not only consider the profitability but also the balance of the profit-making process to achieve stable and lasting profits.

Secondly, the level of profit should also be balanced, not pursuing high windfalls, nor being too "low desire."

Many people initially have high expectations for trading profits, hoping to double or even multiply by N times, but correspondingly, there is the risk of losing N times. If not careful, one may lose everything and fall into the abyss.

Therefore, we must have a reasonable expectation for the amount of profit. It is not reliable if it is too high, and it is also not good if it is too low, because if the profit is too low, it loses the significance of speculative trading, and the trading will not be exciting.

A top-tier trading system must be able to find a balance between risk and reward, ensuring that the risk is controllable and the return is also considerable.For instance, my own trading system typically yields an annualized return of around 40% to 60%. Sometimes in less favorable years, it might only be around 30%, but the compound interest over the years has led to a substantial profit.

Thus, everyone should find their own "balance point," such as an annualized return of 20%, 40%, 60%, etc., and adjust according to their own tolerance level.

Thirdly, to achieve consistent profits, one must consider the execution aspect.

All trading standards of a trading system must ultimately be implemented at the execution level. Just like in warfare, you cannot always engage in theoretical discussions without considering the execution aspect; otherwise, you are bound to lose battles.

There is a significant gap between thinking and doing. Therefore, when establishing a trading system, we must ensure that our indicators are simple, the patterns are simple, and the trading standards are simple, so as not to make mistakes during the execution process.

What should be done specifically?

Firstly, our ideas must be simple. For example, I just want to focus on a simple horizontal consolidation breakout, and other complex pattern structures are irrelevant to me.

I will refine the standards for confirming the pattern, the rules for entry, and the position sizing standards around this simple horizontal breakout. I will review historical data to filter out high-success-rate horizontal breakout opportunities and then select a few instruments that move quickly during the breakout. These constitute my trading standards.

Once you understand the temperament of these few instruments and become proficient in this type of market movement, the simpler your trading strategy, the easier your trading will be. This is the market's "simplicity is the ultimate sophistication" argument, only explained in the most common terms.

3. A top-tier trading system must be standardized and free from personal emotions.Many people might question this point: why is standardization necessary? Isn't it cool to trade with just a bare candlestick and make profits based on one's own market sense?

But consider this: if you trade based on market sense, isn't it often the case that "profits are fleeting, but long-term gains lead to disaster"?

Many people describe their trading criteria as: volume expansion and decline, rapid rise, weak closing, short-term peak, weak decline, insufficient breakout strength, etc., all relying on personal subjective judgment.

The criteria for entering the market are also inconsistent. They might think it's time to enter when the market closes weakly, but next time they might think it's not weak enough and decide to enter later. Each time, the standards are not the same.

When profitable, one's mental state is good, and the judgment is aggressive; when losing, the spirit is fearful, and the judgment is conservative. Without objective criteria, trading becomes a rollercoaster, and one doesn't even know where the losses come from.

So if you want to identify the issues in your trading, and if you want to refine your trading skills, you must have absolute standards. Only then can you find the reasons for the losses, know how to change, and achieve profitability.

Let's illustrate this with a simple example.

The chart is a schematic diagram of the horizontal breakdown classification standard, which is a 15-minute candlestick chart of gold.

Technical standards for horizontal breakdown:

(1) It is required that the consolidation pattern contains more than 40 candlesticks, ensuring that the consolidation period is long enough, and the market has strength after the breakdown.(2) The K-line tests the horizontal resistance level more than three times, which can verify the effectiveness of the resistance level.

(3) The price difference between the points testing the horizontal resistance level should be within four points, ensuring that the horizontal break pattern meets the standard.

(4) Enter the market when the market closes through the horizontal resistance level.

Such trading criteria are very clear and explicit, replicable and quantifiable, without any messy adjectives. The trading process is completely free of subjective judgment and can be operated by anyone. This is what we often refer to as the absolute classification of trading system details.

Only by doing so can we greatly eliminate the impact of emotions on the trading results, making the trading system sufficiently stable.

In summary: In my view, a top-tier trading system needs to strictly control risks, have a stable and sustainable profit-making ability, and also have an absolutely standard execution process. Only by doing so can we trade without panic and with confidence in success.