With Trading: Simpler is Better

I’ve been trading for about 20 years.  I’ve only been consistently making money over the last 5 years.  So if you did the math…for about 15 years I wasn’t doing so well.  🙂  Sure, during those 15 years I had some huge wins and some great streaks, but I’ve also given back my gains and ended up back at zero.  More than once!

I have learned a lot along the way, and one of them has been this:

With trading, if you can simplify anything…do it!

I learned this the hard way.  I used to have complicated trading filters, with tons of variables.  Some of them had 10+ different criteria.  Multiple moving averages, multiple indicators, specific pricing action, etc…

I would build up stock filters like that Jenga game.

Slapping one criteria on top of another one.

Building it bigger and bigger.

Then, to prove how great this complicated structure was, I would then backtest it.  I’d change one of the criteria and then backtest.  Did it improve the results or reduce them?

Then I’d tweak another criteria…backtest.  Did it improve or reduce the success rate?  If I’d change criteria #8, and it seemed to improve the results, what if I went back to adjust #3?

Make that change.  Backtest.

With each additional criteria that I added to my filters, you can start to see that it has become so complex, that you start to lose touch with what makes a successful stock filter or trading method because you don’t know what is important anymore.

Not only that, what I’ve described is “curve fitting”, which is where you build up a system or filter that has become optimized to your past data.  That does not mean that it will work in the future (and very likely wont).

Also, markets change.  Systems that work for a while, mysteriously stop working over time.

If your method is so complicated, how do you know what to adjust?

Answer: If your method is way too complicated…you freaking don’t!

Just like that Jenga game, if you were to remove one of the blocks (filter criteria), will it come crashing down to earth, or simply leave the structure unchanged?  Is it important, or not?

You simply don’t know!

Simply your method, simplify your system

I found that when I came up with a simple method, one that is very easy to describe, and created simple filters to find those opportunities, I started to make money.

My overall trading method is pretty simple, you could probably describe it on a post-it note.

I used to come up with these complicated, impressive looking systems, using trading platforms with all types of impressive looking code.  I felt good about myself.  Proud.

You know what happened?  I lost money!

Now, I don’t care that I have a simple trading system.  It simply works.  It grows my account.  It’s also not perfect.

In addition, I also make mistakes.  I also have times of self-doubt.

But at the end of the day, it’s been working for me to simplify my methods, simplify my screens, simplify my risk management because it makes money!

I’m not embarrassed about my system and have nothing to apologize for.  I don’t trade for ego anymore.

Simplify your trading tools and software

Most of my trading tools that I use are super simple.

Many are free and available on the internet.

Others are very cheap and don’t cost a lot to use on a monthly basis.

I used to salivate over amazing tools (and they are amazing) like Tradestation.  There is so much you can do with platforms like that!  I’m not saying you shouldn’t use robust platforms like that…only that if you do, try not to get bogged down with overcomplicating the features and strategies that can result from using those types of platforms.

For me, I found that I got enamored by all of the bells and whistles.  Next thing I knew, I had this monster that I created that got completely out of control.

Maybe it’s just me, but I found that I got so involved with trying to create complicated systems and use complicated and arcane indicators that I wasn’t able to see the forest from the trees!

I also found that platforms like this forced me to over-trade.  The real risk for me was that I would find myself getting sucked in to the “opportunities” that were popping up all of the time.  There were so many variables, so many indicators, blinking lights, alerts, that I was just all over the place.

Now I simply review my daily stock filters (which are simple) after the market closes and pick out (yes, discretionary trading) the ones that I feel match up with the patterns that I believe have the best risk/reward ratio.

Have you ever trading on price alone?

With technical analysis, the sheer amount of complex indicators, algorithms quantitative analysis, etc is mind-boggling!

But at the end of the day, when you are using trading with technical analysis, the most important factor is the price!

That’s it!

Indicators are primarily based upon price…as well as volume and time.  Indicators are taking the pricing action and manipulating it.  Sure, many of them provide unique insights, but when you boil it all down, they all get their data from price, volume and time.

Have you every traded on price alone and removed all other bells and whistles from the chart?

No moving averages, no Bollinger bands, no indicator ribbons across the top and bottom.

No volume.

Technical trading is all about finding patterns that repeat and trading them. 

Everything boils down to price.  As they say, “price pays”.

For me, looking at the pricing action is the most important aspect of trading.  When I find a trade setup that looks very promising, I then look at the volume at key points, as well as indicators.  I find they add extra insight behind the pricing action.

But those “extras” are only there to help me add a little bit of extra detail to the big picture.  The pricing action is really the key to it all.  Technical indicators should not be the tail wagging the dog.

There is an amazing technical analysis book that I read (and have re-read many times over) where 100% of the focus is on pricing.  As a matter of fact, the author (a successful trader) uses price and nothing else to determine what trades to take.

Is that extreme?

Maybe.  Maybe not.

However, the book has been a huge help to me, since it forces me to really look at the past pricing action and think about what is really happening to cause it.  That then helps to then have a pretty good idea of where the future price is heading, and why.

The book is a real eye opener.

Stay tuned for my next post…I’ll put together a nice writeup on it.  It is a unique book with concepts that I haven’t seen anywhere else!

Until then…think about your system, your methods.

Are they overcomplicated?

Can you simply any of them?

Do you think I’m off-base with any of what I’ve posted here?

Let me know.

Talk to you soon,

-Glenn

 

One comment

  • Excellent guidelines. Something I had to go though to become a better and more consistent trader. The book mentioned, probably the one you referred to previously. I tried to find it, but out of stock and have since lost the title. Appreciate if you could e-mail title/author.
    Very much appreciate the effort you put into your site.
    Peter

    Like

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