Why You Should Strive for Simplicity with your Trading

In 1966, in a San Antonio, Texas bar, two guys (Herb Kelleher and Rollin King) had a meeting and one had an idea and drew it out on a napkin…to start a new airline based on a simple idea…Plane flights that connected one city to another, in Texas…

While the rest of the industry had cumbersome hub and spoke configurations, where you had to fly to one large city and connect to another flight to get to your end destination…likely a smaller city.  They would initially service only Texas, never crossing state borders. Southwest Airlines - Napkin, Dallas Houston San Antonio - Simple idea

One of the reasons for this is that during this time, the United States airline industry was heavily regulated by the government, with sky-high bloated airline fares, bloated and luxuriously expensive meals being served on expensive but often…half-empty planes.

By staying in Texas, they could charge whatever price they wanted.

Their goal was to “democratize the skies”, providing low fares, simply getting people where they wanted to go quickly and efficiently, becoming a incredibly successful!

How did they do it?  Simplicity.

  • By following the simple point-to-point, rather than the hub and spoke is reduced travel time for the customer, helping to build loyalty.
  • They only fly one airplane, the Boeing 737.  This is a huge advantage, since they all share the same parts, making inventory maintenance easier.  The mechanics only need to be trained to fix one airplane, not up to 10 like other airlines.  If a plane has problems, and isn’t able to fly…no problem, just swap it out for another one easily, since all of the crew is familiar with the plane and the amount of seats for customers remains the same.  Having only one plane also allows them to purchase planes and parts at a huge discount.
  • Pretzels.  When flying Southwest today, you get a small bag of pretzels.  That’s it.  No fancy meals.  They figured their customers would prefer a low-cost flight to their destination rather than a steak meal.
  • Simplify airfare pricing – They don’t advertise and quote one price, only for the customer to find out after booking that they end up paying fees for baggage and other fees like with other airlines…keeping a loyal customer following.
  • No assigned seats – Southwest has passengers board their plane in three groups, A, B and C, with numbers 1-60 for each group.  Each passenger has their group and number and line up, then pick any darn seat they want as they file through the plane.  This has been showing to shorten boarding time by 10 minutes.  In the airline industry, shortening turnaround time by this amount is huge!

The bottom line?  Focus on simplicity, has enable Southwest to become the world’s largest low-cost airline and carries more passengers than any other carrier in the United States, with over 60,000 employees.

That singular focus on keeping it simple has helped them grow from their 3 city route drwan on a napkin!

Simplify your trading

 

Leonardo Da Vinci was quoted as saying:

“Simplicity is the ultimate sophistication.”

This is so true with just about anything…and certainly with trading.

When I first started to become more sophisticated (with horrible results), I created screens for stocks on a service that I still utilize today, Stockfetcher.  Below is an example of a screen that I used:

set{body_bottom,min(open,close)}
set{body_top,max(open,close)}
set{lshadowsize, body_bottom – low}
set{tshadowsize, high – body_top}
set{tshadowsize2, tshadowsize *2}
set{lshadowsize2, lshadowsize *2}
set{body_size, body_top – body_bottom}
set{body_size2, body_size *3}
set{bodysize, ABS(open minus close)}
set{avgbodysize, CMA(bodysize,5)}
set{shortbodysize, avgbodysize / 3}
set{longbodysize, shortbodysize * 5}
set{currentsize, close minus open}
and close is above 3
and average volume(30) is above 20000
and close is below EMA(10)
and open 2 days ago was below open 3 days ago
and close 2 days ago was below close 3 days ago
and close 2 days ago was below open 2 days ago
and open is below open 1 day ago
and close is above close 1 day ago
and open is above close
and high is below open 1 day ago
and low is above close 1 day ago
and close is above MA(30)
and where the ERSI(4,11) is between 35 and 70
and lshadowsize > tshadowsize

Ugh…right?  

WTF is going on here?  Hard to say, but at the time, I was enamored with tweaking and customizing ever more complex screens/filters, backtesting them to “perfection” and trading the results.

There is a lot going on with this screen…I called it the “Homing Pigeon”, based on a particular candlestick pattern of the same name, added an indicator and threw in moving average criteria for good measure.

It started out working great (I had also backtested it, tweaking endlessly…which is another mistake)!  Looking at my trading records for this screen…it was working!  Then, for whatever reason, it stopped working.

Why?

If you were to look at this, could you figure out why?  I couldn’t.  It’s too damn complicated!  There is so much going on…too many variables.  This screen is hard to summarize in a succinct way…certainly couldn’t put it on a napkin like Herb Kelleher.

Maybe we could consider this screen sophisticated, but in reality, it was not.  I did not know fully what I was doing, did not fully grasp what I was trying to look for in a stock pattern and as a result, maybe I hid that fact from myself by developing a complex looking filter.

Related to this, I love this quote from Albert Einstein:

Everything should be made as simple as possible, but no simpler. We should not confuse the word ‘simple’ with ‘simplistic’. There are many so-called experts who specialize in complexity. It is difficult for anyone to understand what they say. The true expert knows the particular subject thoroughly but is able to explain it to anyone in a manner that is easily comprehensible. Such a person has attained simplicity but certainly could not be called —simplistic.

What can we strive for to simplify our trading?

Remember, that most of the time, less is more.  When you have fewer variables, with your screens/filters and methods, it is easy to get your head around what you are trying to accomplish.

When we understand more fully what we are trying to accomplish, we are more confident in our trades.  In all likelihood, that is only going to increase your chance of success, since self-doubt and second guessing is a recipe for trading disaster.

In the truest sense…less is more.

  • Are you using too many indicators on your charts or filters?  If you are using more than 3, it is probably too much.
  • How many other variables/criteria are you using?  In my example above, I count 14, and that’s not even including the “set” definitions describing the shadow/wicks of the candlesticks!
  • Are you even customizing and tweaking the settings of the indicators?!  In my example above, I couldn’t even bring myself to use the standard RSI, but going with an modification, using the values from an exponential moving average (EMA) as input to the RSI computation and then tweaking the formula’s standard variables!  With hundreds of indicators to pick from, why customize the ones you decide to use even further?
  • Know that there are some very successful traders that trade off of nothing but price and volume.  No indicators.  No moving averages.  Nothing but pure price and volume action.
  • If you are watching a news feed when trading…stop.
  • Do you use an overly complicated scaling-in and scaling-out strategy?  It can be fine to scale in, but is it overly complex, time consuming and stressful?  Do an analysis of your past trades to see if scaling in and out has actually significantly helped.  You might find going all-in and all-out on your trades to be easier and cleaner.
  • Have you considered only one trading setup or pattern, or perhaps just trading one stock or index?  Simplifying what you are considering for trades allows you to become more adept, develop more of a “feel” for your trades.  That is why I’m such a big fan of stock screens/filters in my trading – It drastically reduces the “universe” of trades to consider.  If none show up for me that day that fit what I am looking for…I don’t trade.  With this simplification, you start to adopt the mindset of a hunter, stalking your prey quietly and only taking down the best opportunities.
  • Cut down on your charting time-frames.  Don’t bog yourself down scanning through a ton of time-frames that don’t match your strategy’s holding period.

Do these tips make sense?  Reading through them again now as I type this out just makes me feel more relaxed and at ease.  Trading doesn’t have to be a frenzied, stressful affair.  Simplifying and streamlining all aspects of your trading will make you a better trader.

For now, I’ll leave you with one over-arching goal:

See if you can simplify your trading plan.

Can you boil down and summarize your strategy to a few, easy to understand sentences?

A quick elevator pitch?

When you do that, your mind can clearly focus on what your goals are.

Remember that trading requires:

  1. The ability to trade: You need money in your brokerage account.  You also need knowledge – study, research, develop your skills.  Work on your mindset (that’s why you are here reading this).  🙂
  2. A strategy
  3. Risk Management (no money, no trading)

Steve Jobs:

“That’s been one of my mantras – focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”

Marcus Aurelius:

Always run to the short way; and the short way is the natural: accordingly say and do everything in conformity with the soundest reason. For such a purpose frees a man from trouble, and warfare, and all artifice and ostentatious display. – Book 4

Good luck with your trading…

Glenn

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