How to Control Drawdowns: Wildman Brother Teaches You a Winning Strategy

[Taoguba]

30 Years of Short-Term Trading Experience, Including 25 Years of Low-Purchase Strategies and the Last 5 Years Focusing on Breakouts, Including First Boards, Continuous Boards, and Leaders. All these methods are derived from my self-created “Emotional Quantification ACB Trading System.” Low-purchase is stable but not guaranteed. Veteran followers should know that low-purchase requires setting a C zone for position building and T trading. When reaching the B zone, reduce positions. Both building and reducing positions should be done in batches because low-purchase is influenced by the overall market, not fixed to a specific point. Therefore, I view the timing in weekly zones, build positions on daily charts, and do T trading in intraday charts.

In these 25 years, the two most difficult things are: maintaining high-frequency ultra-short low-purchase strategies and never trading breakouts. This has allowed me to survive in this industry. Looking around, few have survived 30 years doing ultra-short low-purchase, and I only focus on volume and naked K-lines, never on moving averages. My approach is different from most people. I admire Livermore deeply. I’ve read and listened to his “Reminiscences of a Stock Operator” countless times. It’s probably time to revisit this book. About 90% of my system is based on his ideas, such as the least resistance line—stock prices tend to move along the path of least resistance; riding the trend; my cycle pressure values; key point trading; my axis strategy; patience waiting; my chaotic time cycle exit; the market is always right; when wrong, reflect on oneself; emotional control—never let emotions influence your operations, and how to manage emotions through position sizing.

We should learn from Livermore’s legendary ups and downs—when down, it’s about perseverance; when up, it’s about rebirth like a phoenix. I don’t understand why many mention Livermore’s ending—suicide by gun. He made a billion at his peak. Can’t you see? Four bankruptcies and four comebacks. Isn’t that obvious?

The second point is that I am not tempted by the huge profits from breakout trading. The main reason is my understanding of the system. I focus heavily on timing cycles. My low-purchase mode requires C=8 or greater. That means if the market doesn’t fall significantly, I won’t do low-purchase. Now I understand that breakout trading involves C=4, so the timing cycle doesn’t match, and I won’t take risks. I oppose new investors jumping straight into breakout trading.

My current focus on first boards, continuous boards, and leaders is built on 25 years of low-purchase experience. Unlike new investors, after years of practice, I’ve developed fixed patterns for first boards and axis continuous boards. I mentioned earlier this year my goal to challenge a tenfold increase in a year—possible or not?

I used to trade alone, but now I suddenly have 20,000 followers. Among them, true fans are increasing. That means I not only need to do well in my own trading but also learn from and communicate with followers. I observe their growth daily—congratulating when they succeed, worrying when they don’t. Of course, there are no teachers in this market—just because followers like and trust my system doesn’t mean I know everything.

On Taoguba, everyone can freely exchange ideas, learn from each other, and share insights. I will also openly share my trading ideas, market views, and personal holdings.

But I must remind everyone: the platform strictly prohibits stock recommendations and trading guidance. All content I share is personal record and idea exchange, not investment advice.

Followers can reference and discuss, but must make independent judgments, bear their own risks, and invest rationally. Don’t follow the crowd or blindly imitate. Stick to your trading principles.

Today, I want to discuss how to control risk during market declines.

1. Study Livermore’s three key tactics for the market. In short cycles, you can predict market movements simply, and control your trading rhythm and mode based on market expectations. For example, yesterday’s market direction was mentioned in my Thursday post, as shown below.

The above chart shows the Shenzhen market last Thursday. The most important point is that the longest red bar during the day is shorter than the longest green bar, with the green area being larger, indicating a bearish coefficient. The afternoon rebound forms an inverted C, suggesting the market may have another dip similar to the morning. This is a pre-judgment. If you can use Livermore’s three tactics to predict a possible further decline, your trading rhythm will naturally slow down. That’s also a way to control drawdown.

Remember, the index reflects the average performance of all stocks. Therefore, Livermore’s three tactics for the index are more valuable than analyzing individual stocks. Ultimately, on Friday, the market showed a downward expectation. If you can’t understand this, combine Thursday and Friday’s one-minute charts—you’ll see a clear ACB pattern indicating decline.

2. As shown above, market decline is the average drop of individual stocks. How do we select stocks accordingly? Use the strongest cycle pressure coefficient in intraday analysis—remember the cycle pressure indicator. In a larger cycle, if the market drops sharply but individual stocks do not, or even rise, that’s significant. For example, in a four-hour intraday cycle, if the market drops sharply but stocks rise or stay stable, that’s a signal.

Breaking down “not falling but rising,” the first requirement is that stocks should not decline with the market. If a stock drops along with the market, but then rebounds, it may be delayed. For example, if a stock breaks twice and falls, it’s a decline, not a no-fall situation, and it lacks the cycle pressure indicator. Decisions should be made at the end of the day. If the market declines in the afternoon with heavy selling, but the stock closes at a limit down, it indicates chaos in the stock’s time cycle—unpredictable, as Livermore said:

Livermore: “When I see a warning sign, I don’t argue with it. I avoid it! A few days later, if everything still looks good, I come back. I think: if I’m walking along the tracks and see a train coming at 60 mph, I jump off the tracks to let it pass, instead of stupidly standing still. After it passes, I can always get back on the tracks.”

Another term is “counter-rising.” Should we learn to focus on stocks that decline intraday but then rise? Yes. Find stocks with the highest cycle pressure coefficient—like the 9010 smoothness value or the 5.7 limit-up stocks, such as:

Position size is too large. To avoid fear, halving positions is also a strategy, as shown below.

On the same day, through communication and learning, some followers understood this concept clearly.

Some even drew the daily chart showing a large pattern of attack.

Regarding Farsen, I think of the first-board pattern. I remember a post explaining my quantitative first-board approach, breaking traditional thematic first-board thinking. Many say first boards are difficult because they’re stuck in theme thinking. In fact, first boards are about cycle pressure values, high-frequency, and the same amplitude fluctuations. From another perspective, it becomes clear. For example, looking back, the first boards we traded include Farsen and LIT Electronic.

Check LIT Electronic’s larger cycle pattern.

The key point for first boards is not whether the sector is strong but whether the stock’s current bullish ratio is strong. That’s the core of first-board trading. The theme triggers greed, but quantitative sentiment is the market’s essence. If I only focus on first boards, I believe my success rate would be high. But I understand all patterns, so I also do subtraction—like yesterday, I preemptively exited. I no longer analyze the “ground volume and ground price” C-zone pattern because it involves many small cycles, and I lack the energy.

My main focus is on large-volume first boards, large-volume breakouts, continuous boards, and leaders—these four patterns, with cycle durations of C=4 or C=8, are the smallest cycles I study.

Regarding first boards and continuous boards, how to coordinate the weak-to-strong transition in intraday? I looked into Ningbo Construction and found many chaotic approaches. For example, after the fourth board, a weak-to-strong transition occurs. I believe that after the stock hits the limit and breaks, early low positions are taken profit, then it re-bounds. If the overall market is weak that day, and there are missed orders, I focus on the first move.

The key is that if the next day’s divergence turns into consensus, there might be a replay opportunity. But if it doesn’t show a smoothness value of 9010 and instead shows a high-coefficient cycle pattern like ACBC2, then it’s a different situation, as shown below.

Some followers may remember I said that consecutive boards require a 9010 smoothness value, at least 5.7, and that the ACBC2 intraday cycle indicates a chaos in the bullish-bearish ratio. I observed this for a long time. When the plan was to wait for B2, I gave up early due to uncertainty.

After the market closed, the stock broke the limit again, forming a fifth board with large divergence. On that day, it’s necessary to exit first. I also explained that if the divergence can’t be confirmed on the day, wait for the next day’s bidding. If the next day opens high with a smoothness value above 9010, it can be inferred that the fifth board’s divergence is a bearish signal, and the decline may repeat.

If the next day opens lower, it indicates the chaos cycle continues, and the direction is unclear. Usually, I unfollow at this point because I see no clear direction. If I want to bet on direction, I must use its volatility coefficient for T+0 strategies.

For example, if the fourth board opens flat and the fifth opens 1.74% lower, the center shifts downward, and I do a reverse T. Since the fourth board shows intraday weak-to-strong, the bulls are still present. I wait until after 10 am to sell, using moving averages as a reference. When volatility appears, I sell above the moving average; then, as time passes, I buy back below the moving average. I’ve explained this many times. I wonder how many still remember or have given up on it. See below.

I personally choose to exit during the chaos cycle, using my first strategy, so I didn’t adopt the second.

My system is opposite to others. If your quantification is bullish, don’t share the same fear as others. For example, if the market drops early, be patient and wait for the bearish trend to finish before rebounding. Don’t panic with the crowd. If you do, you need to change. Otherwise, trading will be difficult.

3. How to control drawdown? Use put options for hedging. When you anticipate a big decline, put options will rise sharply. If you have positions, consider buying puts to hedge. This is also a way to control drawdown because options are highly leveraged, with large intraday fluctuations.

In summary, three points on controlling drawdown:

1. Use Livermore’s three tactics to predict the market, delay trading or even hold cash for stocks with bearish signals (high cycle pressure coefficients).

2. If the three tactics indicate a decline, trade using the highest cycle pressure coefficient in intraday analysis—like the smoothness value 9010 or stocks hitting the limit-up with high coefficients.

3. If you have positions and the market shows a chaotic pattern, use put options for hedging—an anti-short strategy.

The first image—did everyone notice? The success rate is nearly 100%. Behind this high success rate is the effective use of Livermore’s three tactics: the opening pattern during market rises and falls differ. Many retail investors mistake the high tolerance for profit during bull markets as their own skill, but it’s actually the market’s rising tide increasing tolerance. When the market declines, tolerance drops sharply, and many can’t trade. But if you understand what I’ve explained today, I believe you’ll change.

This concludes my explanation on controlling drawdown and related cases. Did everyone understand?

Personal opinion, for reference only.

Today’s Livermore learning session ends here. My personal views are for reference only. Also, in discussions, I think it’s important who speaks first or last. Let’s slow down the learning pace.

In the world of emotions, you must not have your own feelings—only right or wrong! You need to have that divine eye, see the whole picture!

Learn to develop a correct emotional game system + learn to control your “heart demon.” I’ve shared both methods with you. These are my 30 years of original practical experience. I hope those who see this cherish it!

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**Yesterday’s post continued to be a featured post, increasing its popularity. Here is the list of supporters: @ShanshuiZhiLe @TaoguLuruRuPiBoYin @Qingtian1220 @YouYongHong @Jianyuan @Yuanye888 @QitianDasheng @WoJinHai @YanKunChaoGu @Sxtcj @yhaaaa @HuangNuo @BianZheChao @FengGuoWuHenYi @XiaoNiuXXX @Con123 @GuReedShen @XianYunYang @nbXiangFengYiRan @123KeEr @JieZhuYaoGu @TY003 @BaiMaoMi @HuangHuaiDaDi @ChenErDangNian @QianLongChongSheng @ElvisChi @BY8888 @WoLeGeTianLa @GangZiXueBu @DiTiaoNiu616 @ZhuSiMaJiG @XingYe555 @YingJie @DongChuanDaiRong @JieLin663 @TanBiao @HuiCaiBuHaoChi @BerberMao @XiGeZhangFengLe @ZouGangSiDeXiaoChou @JiaoKuLiangKuai @TongShiDian @GuHaiChenSi @HaoEr @YanYuYeMeng @SuiYueJingHaoPingChangXin @XiaTianDeBingBing @AiHeKeLeJiaBing @MaLaXiaoLongXia8 @ShenzhenLongGangDaDao @CaoMei12128 @MuKexueDeChaoDianYiPao

Thank you all for giving the article its popularity. Your support is my motivation to keep updating. My Golden Fan Team continues to support me as always. I also see many new faces sending support coupons. Thanks for your encouragement, and I wish everyone can soon get your “Sunflower Manual.” If you like my “Sunflower Manual,” I will stay online for a long time to learn with everyone.

Today, I received 53 support coupons, still 7 short of the maximum. Every time I organize the list of rewards and coupons, I deliberately remember the names. One day, we will meet offline at the Taoguba annual gathering, toast and chat. When you mention your name, I will definitely remember who you are.

Thanks for everyone’s recognition. Only sincerity in this world is irreplaceable! My wish is to have students all over the world.