Another indicator, another indicator, another indicator. Suddenly, your chart is filled with 10+ indicators making it impossible to even see the candles. We’ve all been there. Did this mass of indicators improve the trading strategy, probably not. So why are we always trying to add more indicators and complexity? There are probably plenty of reasons for that. But, less is often more.
Simplicity in trading strategies is significant. It offers clarity and direction. Otherwise you will quickly find yourself with numerous and often conflicting signals. We will understand why more complexity is a trap for smart fools and why simple trading strategies are the key to success. Simple trading strategies can be easier to implement and manage, reducing the risk of errors and improving efficiency. Additionally, simplicity can help in clearly identifying market trends and making informed decisions.
While the financial markets are inherently complex, there is value in exploring and implementing simple trading strategies. This exploration is not an endorsement of any particular approach, but rather an informative guide on the features and capabilities of simplicity in trading strategies.
So why are complex strategies holding us back? We think it is three main reasons:
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Paralysis by Analysis
The phenomenon known as paralysis by analysis is frequently observed among traders formulating their strategies. In the quest for optimal results, there is a tendency to incessantly add and adjust components, often with the rationale of incorporating just one more indicator. This iterative process can consequently result in a state of constant planning and adjustment, overshadowing the act of trading itself.
Our advice: just start. Taking the first step is more important than tweaking your strategy for the 100th time. If you are not sure about your strategy yet, at least try it out on a demo account.
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Increased False Indicators
Introducing more indicators and additional layers of confirmation inherently increases the variables within a trading strategy. This escalation complicates the process of statistically verifying the effectiveness of a strategy and identifying the root causes of success or failure.
The risk of encountering misleading signals rises, and traders might find themselves entangled in a complicated scenario, sifting through a mixture of accurate and inaccurate data. The fundamental aim and effectiveness of a strategy can be compromised when overshadowed by excessive complexity.
Our advice, keep it measurable. Only implement strategies that you fully understand and know how to tweak in case it does not work. There is no point in having 10 sophisticated indicators, when you do not know which one is giving the false signal.
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There Are No One-Person Hedge Funds
Addressing the common misconception, it is important to clarify that hedge funds are not typically operated by a singular entity or individual. Taking Renaissance Technologies as an illustrative example, the success of this quant hedge fund is not solely attributed to its founder, Simons, but rather to a collective effort of numerous mathematicians. So, it was a group effort of the smartest brains of the planet.
Our advice, keep it realistic. Only do what you, as a one-man show, can actually manage. It is very unlikely that you can do the work of a dozen mathematicians alone. Thus, do not try to implement the same strategies as they do.
Now that we understand why simplicity is actually key, let us continue down the rabbit hole. The next step is actually to show what you can do. How can you optimize a trading strategy for simplicity?
- Focus on Select Indicators
First and foremost, traders should focus on a few select indicators that they find most reliable. Rather than drowning in a sea of data, choosing a few key indicators can provide clarity and direction. Additional indicators can be employed for further confirmation, but decisions should always be grounded in the main strategy.
- Avoid Adjusting Winning Systems
Moreover, it’s imperative not to meddle with a winning system. If a simple strategy is yielding positive results, allow it to run its course for as long as possible. The temptation to make constant adjustments can be strong, but a well-functioning strategy should be given the time and space to prove its worth.
- Prioritize Quality Over Quantity
In the vast spectrum of trading, it becomes evident that quality holds precedence over quantity. Traders are cautioned against engaging in numerous, high-risk trades, which may position them at a disadvantage compared to larger financial entities like hedge funds. A more prudent approach involves concentrating on a smaller number of trades with higher success probabilities.
- Learn from Successful Traders
For those still familiarizing themselves with various strategies, observing the practices of successful, established traders – often referred to as "smart money" – can be beneficial. Such observation can serve as a foundation, aiding in the development of individual trading strategies.
- Consider Specialization
Specialization is another strategy worth considering. Many successful trading firms allocate resources to specialize in a specific market, achieving a depth of knowledge and expertise in that area. This focused approach aligns with the Pareto principle, suggesting that a significant majority of results come from a minority of inputs.
Final Words
For our final words, we would like to quote Albert Einstein:
“Everything should be made as simple as possible, but not simpler.”
Adopting a simpler approach doesn’t mean standing still or avoiding new ideas. It’s about carefully choosing what really works to improve a strategy. Embracing simplicity is an ongoing effort, focusing on refining and ensuring every part added has a clear purpose and value. It’s not just about cutting back but about finding a balance where clarity, efficiency, and effectiveness come together. For you, that simply means continuously trying things out on the charts. Whenever you are finished with a strategy, take a look at all the indicators and ask yourself, “What part of my strategy is not 100% essential?” You will often find that you might still eliminate one or two unnecessary elements. When you reach the point where you cannot make it simpler, that’s when you know you optimized your strategy.