Building a Trading System: Induction, Deduction, Patterns, Reasoning, and Validation

In the novel, the Trisolarans ask why people on Earth believe that the sun will rise as usual tomorrow? There are two kinds of thinking here. They think that the sun has risen as usual since ancient times, so there is a high probability that it will be the same tomorrow. This isinduction, and to deduce and prove according to the laws of physics, this isdeductive method。

When building a trading system, we must also use induction to summarize experience, then use deduction to derive theories, and finally use reality to prove your theory. For example, you find through observation that when the price breaks through the new high on the 20th, there is a high probability that it will go up. Then you can design a strategy to go long when it breaks through the highest point on the 20th, and close the position when it falls below the lowest point on the 20th. However, this is symmetrical. Assuming that the long and short market is also symmetrical, then you will have no room for profit. At this time, you have to show your scientist temperament and make a bold hypothesis. If you close the position in advance when it falls below the ten-day low, wouldn't you be able to retain part of the profit? In addition to this, can I use a trailing stop? Can I increase my position when I am profitable?Then through logical derivation, combine the entry, exit, stop loss, take profit, position management and other elements of your trading system.Then go through a lot of verification. If it is finally proven that your system has a probability advantage and is expected to be positive, wouldn't you be successful?

Qualified traders have the temperament of a scientist, just like Einstein. When he saw the contradiction between electrodynamics and Newtonian classical mechanics, he boldly proposed the principle of the constant speed of light, and then established the special theory of relativity through the Lorentz transformation. This is the same process when we build our own trading system. You can first look for patterns on the market, then make bold and reasonable assumptions, and get your own trading system through logical deduction. This is not over yet. The theory of relativity was accepted by everyone after a large number of experimental verifications after it was proposed. The same goes for your system. You need a lot of experiments, including review, simulation, real-time trading, etc., to constantly verify it and optimize it so that it can ultimately be what you want. Once you succeed, you will have the capital to settle down in the market. One thing that must be noted here is that you should not start from scratch on your own. Any great achievement is accomplished by standing on the shoulders of giants.