What's most important for making money in a bull market? Building your own trading system
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What's most important for making money in a bull market? Building your own trading system
If you're a beginner who still relies on inspiration to trade, it's time to start building your own trading system.
Navigating Web3 tides with focused insightsBy: 4Alpha Research
Most seasoned traders with over five years of experience deeply understand that in the early stages, trading often relies heavily on intuition. However, repeated losses teach them that intuition is far less reliable than a systematic approach. Intuition amplifies human weaknesses—flaws we cannot fully overcome. Only through a well-structured system can these be properly regulated. If you're a beginner still relying on inspiration for your trades, it's time to start building your own trading system!
No Trading System Guarantees Constant Profits
A trading system is essentially an operating framework. In computing terms, think of it as a complete human-machine interaction system—people use this system to direct computer operations. From a biological perspective, it resembles conditioned reflexes: “When signal A appears, action B must follow.”
A trading system is a comprehensive set of signal rules governing entry and exit points, stop-loss, take-profit, and overall buy/sell decisions.
There are many misconceptions about trading systems. Some believe their lack of profitability stems from not having a personal trading system, assuming that once they have one, profits will naturally follow. Others think their current system isn’t good enough and that better returns require finding a superior one. Still others firmly believe there exists a magical trading system that guarantees risk-free profits if followed strictly.
Are these beliefs credible?
First, it must be clear: just as perpetual motion machines or elixirs of immortality don't exist, neither does a universal, perpetually profitable trading system. If such a system existed, smart people would have already discovered and exploited it.
Second, even possessing an excellent trading system doesn’t guarantee consistent profitability. An effective system demands strong execution discipline—strict adherence to its signals without deviation. Moreover, no single system suits everyone. Each trader must find a system aligned with their personality and risk profile, which cannot be measured by generic standards of “good” or “bad.”
To find a suitable trading system, one must first correctly understand and define the role of such a system.
A trading system functions like military doctrine. Strictly following it may not ensure victory in every battle, but it prevents catastrophic defeat and preserves opportunities for future engagement. The trading system operates at the strategic level; combinations of “trading mindset” and “tactics” belong to the operational level; specific trade actions represent tactical execution.
Only by accurately understanding the function and limitations of trading systems—and combining this awareness with self-knowledge—can traders achieve better results.
How Should We Evaluate a Trading System?
When assessing a trading system, I believe only one core metric truly matters: the profit factor (or reward-to-risk ratio). This refers to the average profit per winning trade divided by the average loss per losing trade.
For example, suppose you invest 1 million yuan and execute 10 trades using a particular system: 4 profitable trades yielding 150k, 250k, 350k, and 450k respectively; 6 losing trades with losses of 100k, 150k, 100k, 50k, 70k, and 200k. The average gain is 300k, the average loss is approximately 111.7k, resulting in a profit factor of 30 / 11.17 ≈ 2.69. If you continue trading under this system—over 100 or 1,000 trades—you should theoretically generate profits. A profit factor below 1 indicates net losses.
However, when evaluating objectively, we must allow for margin of error. Personally, I believe the profit factor should never fall below 2. More specifically:
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A profit factor of 3 is acceptable—equivalent to a score of 70;
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A profit factor of 4 is good—equivalent to 80;
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A profit factor of 5 is excellent—equivalent to 90;
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A profit factor above 5 qualifies as outstanding—full marks.
Note: Trading systems with a profit factor exceeding 5 are extremely rare. I encourage you to calculate the profit factor of your long-term trading rules to better assess their effectiveness.
What Elements Should a Trading System Include?
Before building a trading system, ask yourself: What is your investment goal? Is it overnight wealth? Steady growth? Rapid appreciation? Also, what return expectations do you have? 100% annual return? 100% monthly? 30%, 50%, or even 200% per year? These questions significantly influence how you design your system.
Additionally, consider your risk tolerance and preferences. Can you withstand drawdowns over 30%? Are you comfortable with up to 20% fluctuations? Only able to tolerate minor drawdowns within 5%? Or absolutely intolerant of any loss? These risk-related considerations are essential. Without clarity here, any attempt to build a system lacks purpose—and certainly won’t be optimal for you.
A complete trading system should incorporate seven key components:
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Market Cycle Analysis: Understand macro market trends and identify the current phase (bull market, bear market, sideways market, etc.).
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Trading Mindset: Define your fundamental trading philosophy—short-term scalping vs. long-term holding.
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Coin Selection: Use defined criteria to select high-potential assets.
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Timing: Determine optimal entry and exit moments.
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Buy/Sell Rules: Establish clear strategies for entering and exiting positions, including precise conditions.
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Capital Management: Allocate funds wisely to avoid over-concentration or excessive diversification, ensuring efficiency and safety.
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Risk Control: Implement risk management protocols, including stop-loss mechanisms and position sizing, to mitigate investment risks.
By thoroughly considering and integrating these elements, you can construct a personalized trading system that effectively supports your investment objectives.
Let’s examine each in detail.
1. Market Cycle Analysis
"Go with the trend" is the primary principle in investing. When the broader market rises strongly, the success rate of your strategies, coin selection, and timing all improve significantly. Even imperfect tactics can yield gains during bull runs. If you recognize a stable upward trend, your psychological comfort increases, enabling confident buying at low points—reducing cost basis and maximizing profits. Conversely, without a clear view of the market trend, uncertainty breeds emotional volatility, leading to overreactions to minor price swings and distorted decision-making.
Moreover, cycle analysis provides critical guidance for subsequent actions: in bull markets, trade aggressively with concentrated positions; in bear markets, maintain light exposure and diversify holdings.
2. Trading Mindset
Trading mindset can also be understood as the overarching strategy applied under different market conditions. However, this mindset depends fundamentally on accurate assessment of the overall market. It’s akin to planning a military campaign—how long it lasts, the scope of engagement—all predetermined. You shouldn’t revise plans mid-battle, arbitrarily increase forces, or shift direction impulsively.
3. Coin Selection
Coin selection becomes especially crucial during bull markets. To achieve alpha returns, you must carefully pick your assets and minimize frequent switching. Excessive rotation risks missing major rallies—often selling a coin just before it surges while holding others that underperform. The key to bull market profits lies in heavy positioning combined with long holding periods.
This is particularly true for large institutions and funds managing over 100 million yuan. Global equity long-only funds rely on stock-picking as their core competitive advantage—a defining characteristic across fund managers. Timing-based strategies assume outperformance of the market. Smaller operators managing millions might succeed with market timing, but as capital scales up, timing efficacy diminishes sharply.
So, what characteristics define a high-alpha asset? Let’s consider the perspective of a market maker or institutional player with substantial capital. If you were orchestrating a move on a certain coin, which ones would you choose?
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Small float size—but not too small—to ensure sufficient liquidity for smooth entry and exit.
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Backed by strong thematic momentum and free of historical baggage (e.g., previously manipulated by big players or tainted reputation).
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Supported by solid on-chain data or potential for fundamental improvement, allowing for clean distribution at higher prices via “earnings growth + token incentives (airdrops, dividends, staking rewards) + narrative support,” without causing sharp price declines.
4. Timing and Buy/Sell Rules
Timing involves precisely identifying entry and exit points, applicable to both medium-term swing trading and short-term speculation. Buy/sell rules formalize trading discipline. For instance, entries must satisfy technical buy signals and be timed for short-term momentum, expecting rapid upside after purchase. Timing is the primary tool for risk control—even in bull markets, sharp corrections occur. The core value of timing is avoiding such pullbacks and major bear phases. During poor market conditions, staying flat (in cash) is advisable.
Within a trading system, buy/sell rules should retain some flexibility and discretion—around 20% to 30%. Fully rigid rules lead to mechanical trading lacking adaptability. Entry logic varies based on trading mindset and market context—different environments produce different setups. Yet one principle remains inviolable: **entries must be based on technical buy signals**.
Exit rules similarly vary by market condition and strategy. Different return targets imply different profit-taking approaches. Exits needn’t wait for definitive technical sell signals—by then, one or two red candles may already erode profits. Thus, exits require foresight: once target levels or potential peaks are reached, consider selling.
With such structured rules, traders can respond flexibly to changing markets, maximizing gains while effectively managing risk.
5. Capital Management
Capital management consists of disciplined policies. Examples include: “Withdraw 10% of annual profits into safekeeping every fiscal year”; or “Open new positions only after securing profits from initial trades.” Another critical consideration is leverage. While many in crypto achieved financial freedom via leveraged trading, whether and how much leverage to use depends on individual temperament. Remember the industry adage: “Profit and loss share the same source”—what makes you money can also wipe you out. Many get rich quickly; many blow up just as fast. For beginners, I recommend caution with leverage, as it magnifies emotional responses to market volatility, often leading to suboptimal trading behavior.
6. Risk Control
Risk control comprises non-negotiable ironclad rules—each trader develops their own based on experience. These rules serve as the final safeguard against errors driven by greed or侥幸 (wishful thinking). Adhering strictly to risk controls also stabilizes emotions, preventing unnecessary losses caused by psychological turbulence.
Example of a Trading System
A trading system delivers clear entry and exit signals, standardizing trading behavior. Trades occur only when the system generates a signal; otherwise, patience prevails. For existing positions, hold regardless of profit or loss. For those in cash, await system-generated signals before acting.
The reason such frameworks are called standardized operating systems is to eliminate discretionary, impulsive trading. Human nature has weaknesses, and psychology plays a vital role in trading. While discretionary trading is possible, even the simplest system offers structure. For example, a basic moving average rule: buy when price is above the line, sell when below. Even seemingly absurd rules—like buying stocks on smoggy days in Beijing and selling on sunny ones—constitute a system. Similarly, simplistic “systems” such as buying on odd-numbered dates and selling on even-numbered ones provide complete rule sets that help prevent emotionally driven decisions—even if they don’t guarantee profitability.
The most sophisticated trading systems involve top mathematicians leveraging computers and massive datasets to build complex models for automated trading. For retail traders, however, a system isn’t better simply because it’s simpler or more complex—it’s better only if it’s more effective. Simplicity or complexity has no inherent correlation with quality.
Take, for example, the most famous application of simple moving averages: Granville's Eight Golden Rules.
Granville’s Four Buy Signals:
(1) When a declining moving average flattens and turns upward, and the price breaks above it from below, this is a buy signal.
(2) If the price briefly dips below an upward-trending moving average but quickly rebounds and resumes trading above it, this is a signal to add to long positions.
(3) When the price dips toward but does not break below a rising moving average, and then resumes its uptrend while the MA continues rising, this remains a buy signal.
(4) If the price falls sharply below the moving average, a strong bounce may follow—also a buy signal. But remember, after the rebound, prices may resume their decline, so don’t hold too long. The overall trend has weakened, and prolonged holding risks getting trapped.
Granville’s Four Sell Signals:
(5) When an upward-moving average flattens and reverses downward, and the price breaks below it from above, this is a sell signal.
(6) If the price briefly rallies above a falling moving average but soon drops back below it, and the MA remains in a downtrend, this is a sell signal.
(7) When the price rises from below the MA toward it but fails to break through and retreats again, this remains a sell signal.
(8) When the price surges rapidly above a rising moving average, risk escalates sharply—correction looms. This is another sell signal.
In summary, Granville’s Eight Rules analyze price trends using moving averages and generally follow these principles:
An upward-sloping MA suggests buying opportunities; a downward-sloping MA signals selling. The best buying moment occurs when the MA transitions from falling to rising and the price breaks above it from below. A key selling opportunity arises when the MA shifts from rising to falling and the price breaks below it from above.
Granville’s Eight Rules represent one of the simplest and most widely known trading systems—but they are overly generic and require customization depending on specific market conditions.
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