The bull market is the main reason ordinary investors lose money; three basic principles to consider when formulating trading strategies

Source: Talking Li, Talking Outside

Benjamin Graham wrote in The Intelligent Investor:

Bull markets are the main reason ordinary investors lose money.

How much risk can you bear? First, ask yourself: Are you married? Partner's income? Do you have children? Do you have an inheritance? Do you have elderly to support? Is your job secure? Do you need this investment to provide stable cash flow? Finally, how much loss can you tolerate?

Is it possible to be greedy when others are fearful and fearful when others are greedy? The problem with this strategy is: bear markets have no bottom, and bull markets have no top.

Managing a portfolio is like cooking a delicate dish; once determined, do not change it lightly.

The public cannot make money by accurately predicting the direction of the stock market.

Everything will pass. The equally eternal investment admonition is: maintain a margin of safety.

……

I remember a few days ago, a partner in the group shared a saying: Stick to your trading philosophy and principles; money can be made endlessly, but it can also be lost completely. I feel this saying is quite representative. Many people love bull markets because, during a bull market, people always believe they can definitely make money. However, for many (especially newcomers entering during a bull market), a bull market can actually be a beautiful trap.

If everyone can make money in a bull market, then you should consider one question: Where does your profit come from?

If you haven't figured out this question, then you might be the one providing profits to others during the bull market. If you don't want to be that person, you should start to form and refine your own trading strategy as soon as possible. In this issue, we will continue to outline several basic principles to consider when formulating trading strategies based on methodology:

1. Keep it simple, but not singular

In the Talking Li, Talking Outside toolbox, we provide dozens of commonly used on-chain tools, and these websites also cover a lot of data. Additionally, in some past articles, we have shared many practical on-chain data indicators and their uses. However, many people still frequently leave comments asking us for more tools, always hoping to collect a lot of data or indicators to increase their trading success rate.

But to be honest, even if you collect over 200 different indicators, will you really take the time to look at all of them? Do so many indicators actually help your trading?

As we mentioned in a previous article on Talking Li, Talking Outside: If you enjoy learning and conducting data research, you can certainly understand various indicators and the logic behind them from different dimensions. But if you are mainly doing some basic trading, the mindless combination of too many indicators will only consume a lot of your time and energy, and we believe it won't help you much because complex strategies with many parameters can easily lead to what is called overfitting.

For most ordinary traders, the best strategy is often simple; you just need to focus on a few key indicators (parameters) and thoroughly understand the logic behind them. In other words, trading should strive to remain simple (focusing on a few key indicators) but not singular (thoroughly understanding the logic behind them); quality is sometimes more important than quantity.

Here's a simple example; let's take the candlestick chart that everyone can read:

Currently, there are many indicators related to candlestick charts. In addition to basic ones like MA, EMA, BOLL, RSI, there are many extended indicators or patterns, as shown in the image below.

However, for most ordinary traders, perhaps a combination of trend lines + channels + Fibonacci + MACD is sufficient. As shown in the image below.

Then, what remains is human nature; for example, who can endure loneliness and temptation better, who can strictly manage their positions and risks, and who can dedicate more time and energy to learning and improving…

2. Don't touch what you don't understand; protect your capital

This is also one of the two basic trading premises we often mention in Talking Li, Talking Outside, especially applicable to newcomers. For example, during the recent MemeCoin craze, some people saw others becoming rich overnight by investing in dog coins and couldn't resist joining in, transforming into $10 warriors to join the battle. What happened next?

Let's not talk about the loss of capital for now; after all, losing $10 doesn't matter to many. However, many newcomers overlooked the issue of gas fees, directly imitating others to rush into dog coins on the Ethereum chain, and then left comments asking questions like: Why has the money in my wallet decreased? Why has the coin I bought decreased? Why…

The reason is simple: these people only considered how to turn $10 into $10,000 in one day or simply become rich overnight, often neglecting the cost issue. When investing small amounts in dog coins on Ethereum, you not only need to consider gas fees but may also face high slippage issues.

In other words, the cost issue is easily overlooked, but sometimes it can be more important than you think.

The principle of "don't touch what you don't understand" involves many aspects. In addition to needing to conduct necessary research and understanding of your trading targets, you also need to perform necessary cost backtesting of your trading process. The aspects you need to consider should at least include:

- Commissions

Different DEXs and CEXs may charge different trading commissions, especially DEXs (including some TG Bots). You need to understand the relevant fees before trading. As shown in the image below. Of course, many CEXs charge a fraction of a percent in commissions, which can be negligible for many.

- Slippage

Especially when trading MemeCoins on some DEXs, due to liquidity and price volatility issues, you often need to set a higher slippage to successfully execute a trade.

In addition, you may also need to consider market impact, spread, and other factors that affect costs.

In summary, the execution of any strategy requires adherence to the two basic premises of "don't touch what you don't understand" and "protect your capital." "Don't touch what you don't understand" helps you avoid falling into traps and temptations, while "protect your capital" allows you to "live" longer in this field.

3. Respect the market, fear the market

Many people always want a definitive answer in the market, such as always hoping to ask: Will Bitcoin reach $100,000 this year? Will Ethereum reach $5,000 this year?…

The market cannot be predicted because it is constantly changing, and this change carries uncertainty.

Although many KOLs, bloggers, or so-called signal teachers seem to be able to accurately "predict" future trends or prices, I prefer to call their (including my own) predictions "guesses." Because through historical data backtesting, combined with factors that influence market direction and personal experience, it is indeed possible to make some relatively reasonable guesses about the future market. But a guess is just a guess; ultimately, it still belongs to a probabilistic issue.

And this probabilistic issue needs to be considered in conjunction with cycles and other factors, for example:

If someone tells you that there is a 99% chance Bitcoin will reach $500,000 within the next 10 years, would you consider holding Bitcoin now? Or would you consider the 1% possibility?

Or, if someone tells you that in the first quarter of next year (2025), Bitcoin is very likely to exceed $100,000, how do you understand this "high probability"? How much capital would you be willing to risk for this high probability?

Or, if someone tells you that in the coming weeks, Bitcoin may experience a pullback, possibly falling to the range of $89,000 - $91,000, how do you understand this "possible" and "maybe"? How much funds would you prepare to continue buying for this "maybe"?

Of course, it is also possible that someone will open two positions at the same time, one long and one short, and whichever one makes money, they will show off that one, claiming a 100% win rate, making you believe they are a master of perpetual profits, and all you need to do is "pay a little tuition" to be led to wealth.

In summary, everyone's personal situation is different. Some may choose to bet their entire worth for a 20% chance, while others may only be willing to try with a small position even when facing an 80% chance. In this field, we must learn to respect the market and also to fear the market. When you decide to make a seemingly profitable choice based on someone else's guidance or conclusion, you should also consider the possibility of losing money in advance. If you want to continue to obtain reliable returns in this field, then you should DYOR and start forming and refining your own trading strategy as soon as possible.

Note: The above content is merely personal opinions and analyses, intended for learning records and communication purposes only, and does not constitute any investment advice. Any projects or websites mentioned in the article have no direct interest relationship with Talking Li, Talking Outside (Talking Li, Talking Outside does not accept any advertisements from project parties). Please evaluate the safety of the corresponding projects or websites on your own. Investment always carries risks; avoid entering situations you don't understand, and don't play in situations you can't afford to lose.