Albert Einstein said that everything should be made as simple as possible but no simpler.
What application does this have to trading? The answer is – everything!
Complexity is the enemy of profitable trading – the more complex any system is the more likely it is to break down when the environment changes.
Why is this important? Because the markets are changing all the time, it is only a matter of time before a complex trading system encounters conditions that reduce profitability or worse – break the system totally.
In contrast, a simple trading system that is based on a sound long term profit driver (such as the tendency of markets to trend) has a much stronger chance of surviving than a complex system designed by a rocket scientist that exploits ultra small short term relationships between ABC stock and XYZ stock.
I apply this in my own trading in several ways:
- Ensure every trading rule is based on some logical behaviour that I can explain easily
- Evaluate whether any additional complexity is justified by the performance improvement generated by the rule
- Ask whether I can express every rule in a simpler, more generic way
- Ensure that each rule comes into effect enough times that it is really significant over a long period of time (a rule that improved performance
- Challenge each trading rule to see if historical backtesting performance can be largely maintained without the rule
Was Einstein a trader? I don’t know, but his famous quote should certainly be considered by all traders!
So what is your action? Review your trading rules now with the 5 simplification principles in mind. If you haven’t got your trading rules yet then keep these in mind as you design your stock trading system.
Trade Simple –> Trade Successful
Please comment below or ask me a question about how to simplify your trading.