Simple = Smart??

[pierre 10]

Why are some traders able to trade successfully with simple methods while others use complex strategies?

 

Just because a trader uses advanced and complicated methodologies, does this make him smarter than a trader who uses a simple method?

[Soultrader 12]

How would you define smart to begin with?

 

One difference I think is the ability from one trader to another to process the same information.

[ant 10]

Here are some of my thoughts on this topic...

 

To develop a simple, yet effective (read as profitable), trading strategy takes time, knowledge, and experience. Developing a "simple method" that works is a very difficult thing to do! It is the end result of a very long process. On average, how long does it take for a trader to become consistently profitable? For most traders that eventually succeed, it's years. So I would say that to develop a profitable "simple method" requires one to be "smart".

 

However, if a "simple method" is defined as using the same old trite indicators in the same old tired way that most traders do, as described in most books, than that won't lead to success either and is not that "smart". Successful traders do not follow the crowd, they carve out their own path and devise a unique system that works for them. I also doubt that most successful traders use indicators (operative word here is "most'). But that's a topic for another thread.

 

On the contrary, a "complex strategy" does not imply that the trader is "smart". I believe most traders make their trading complex because they throw everything, and the kitchen sink, into their strategy thinking that more is better. They do not know how to discriminate between the good and bad information/ideas that's out there. As discussed in another thread, higher education is probably not required to be a successful trader, but intelligence certainly is. To me, being intelligent means being able to learn how to frame out or structure the markets in a way that makes sense (i.e., doesn't appear random or chaotic), filter out the truly useful ideas, and then use a few key ideas in a unique and clever way that allows you to extract money from the markets. More often then not, when discussing most traders at large, a complex strategy usually indicates that the trader is "not so smart". I'll get off my soapbox now.

[Soultrader 12]

Here are some of my thoughts on this topic...

 

To develop a simple, yet effective (read as profitable), trading strategy takes time, knowledge, and experience. Developing a "simple method" that works is a very difficult thing to do! It is the end result of a very long process. On average, how long does it take for a trader to become consistently profitable? For most traders that eventually succeed, it's years. So I would say that to develop a profitable "simple method" requires one to be "smart".

 

However, if a "simple method" is defined as using the same old trite indicators in the same old tired way that most traders do, as described in most books, than that won't lead to success either and is not that "smart". Successful traders do not follow the crowd, they carve out their own path and devise a unique system that works for them. I also doubt that most successful traders use indicators (operative word here is "most'). But that's a topic for another thread.

 

On the contrary, a "complex strategy" does not imply that the trader is "smart". I believe most traders make their trading complex because they throw everything, and the kitchen sink, into their strategy thinking that more is better. They do not know how to discriminate between the good and bad information/ideas that's out there. As discussed in another thread, higher education is probably not required to be a successful trader, but intelligence certainly is. To me, being intelligent means being able to learn how to frame out or structure the markets in a way that makes sense (i.e., doesn't appear random or chaotic), filter out the truly useful ideas, and then use a few key ideas in a unique and clever way that allows you to extract money from the markets. More often then not, when discussing most traders at large, a complex strategy usually indicates that the trader is "not so smart". I'll get off my soapbox now.

 

Interesting comment ant. I completely agree with your statement on "Developing a "simple method" that works is a very difficult thing to do! It is the end result of a very long process."

 

New traders may have trouble grasping this idea but it is as true as it can get. Professional traders appear to trade calm and with simple methods. But this is because they are on auto pilot taking setups that they have designed. They are comfortable with their methodologies and can take trades easily. New traders on the other hand have yet to develop rules and setups. This causes fear and overtrading.

[ezduzzit 10]

Hmm.. I would have to say there was definitely some market wisdom in those comments by Ant.

 

Let me very strongly suggest to you however that much of the long period of struggle is perhaps unnecessary because it is foolishly spent looking for the Holy Grail of indicators, systems or strategies. Yes, you have been told this numerous times before, but did you really pay attention?

 

New traders seldom take the time to learn the lay of the land (the real underlying structure of the market they wish to trade) or find a trusted guide to this treacherous territory, until such time as they have totally exhausted themselves and their trading capital in their useless search for what others told them (on day one) did not exist. Would they listen? Absolutely not! Thus the actions of most traders, in their early years, cause them to appear to be "dumber than a tree stump" until they have finally reached that exhaustion point. It seems only then that they will begin to listen to the wisdom of those who have gone before them rather than thinking they will somehow come up with that one right combination of magic indicators that works almost every time.

 

Here's a (really important) little hint: It is more about observation of market movements and also harnessing your own emotions than it is about strategies, indicators, methods and systems. Don't be blinded by the B.S. comments bandied about by the 95% who can't trade to save their lives but who still love to read their own opinions in print! I wholeheartedly assure you that there are traders successfully trading many of the methods and/or strategies that you have already tried and discarded as useless. It is far more about you than it is about the individual method.

 

Some compare the markets to a dangerous jungle, others to a battering trip down the rapids. Either way, if you don't understand the lay of the land and act accordingly you will either get eaten or bashed upon the rocks in very short order.

 

If you were suddenly uprooted from your quaint, comfortable and cozy little home environment one day and suddenly forced to make your living in the jungle wilds (with no realistic possibilities of escape) would you take the time to survey things and get a lay of the land or perhaps even search out an experienced and trustworthy guide to help assure your survival?

 

Would you perhaps begin to look for the tell-tale signs of all the treacherous snakepits, quicksand, crocodile haunts, lion and tiger dens, etc. or would you boldly stride through the jungle with only your fancy new hip-boots, trusty multi-function pocketknife and some newfangled high-tech compass and just hope for the best?

 

I daresay that although the right answer to the question above seems obvious, 95% of newbie traders choose the second alternative almost every time. They have already firmly and unflinchingly bought into the hyped idea that trading the markets is going to be their financial savior. That it is going to be easy and the one sure way to an eventual fortune if they just open an account, select a robust charting system that offers enough of those amazing indicators and pay attention. They feel they are already "smart" and thus quite capable of pairing the right indicators and strategies together to make this thing totally "easy peasy" so they can soon be "rolling in the dough" (celebrating their huge winnings.)

 

If you are going to ride the rapids of a river for the first time, I daresay you had best either hire yourself a damn good guide or else you had better find out where it is deepest, which way the currents flow at different points, where the bends and treacherous twists and turns might be, how fast it moves across these key points of danger (and whether there might just be an undertow at some of those points that could suck you under never to be seen again) whether the time of day makes any difference in the flow of those rapids, and even what type of boat and paddles migh best serve you on your trip as you finally set out to navigate that river.

 

If you cannot find an acceptable guide, then yes, you will have to do all that surveying and planning work on your own, through observation and more than a little testing BEFORE you just jump in and wing it. The same holds true for navigating a trip through the markets. [by the way, for those of you who did not quite understand all that.. the jungle and the river rapids=the markets, and the professionals (who eat, sleep and breathe these markets) are the snakes, crocs, lions, tigers, etc.] Once you jump into the markets you are already in the jungle or the rapids and your job is to get through each day reasonably unscathed while slowly but steadily improving your long term survival skills based on what you learn from each outing (trade.)

 

Perhaps truly "smart" new traders would best be served by taking an initial period of 6 months or so to simply observe the price action in the markets day to day. They should perhaps also give up most, if not all of those fancy and mostly useless lagging indicators. I mean who in their right mind would dare risk driving their car down the high-speed freeways while focusing almost entirely on the view in their rearview mirror for guidance and direction?

 

Also, just as a side issue since we are speaking of "smart" here, why do you think that the reportedly best "analysts" in the market invariably make some of the absolutely worst traders? Is it possibly that they get too caught up in the trees to see the forest and keep running directly into huge trees right in front of them? Is it perhaps also because they are used to playing a safe and emotion free game as analysts and thus are not prepared for the real battle of the trading those same markets with real money, a battle which is mostly fought between themselves and their own emotions?

 

Nobody but nobody knows exactly what is going to happen next in the markets, so don't invest your extremely valuable time and hard earned money into trying to come up with indicators and fancy, complex methods to predict it. A firm called Long Term Capital Management tried that already and failed quite miserably. Mind you, they had more computing power than almost God himself, a large group of some of the very brightest minds in the business,etc and yet they still lost so much capital that their failure almost sent the whole U.S. economy into a tailspin.

 

If you wish to be truly "smart" about trading then I'd say you should have precious few indicators and instead should focus on becoming a Master of the Obvious. That means focus intently upon what is happening right now, right in front of you on your screen in the form of price movement and the reactions that repeat themselves over and over again as movement comes to value points, S/R or Fib points that lie in its path. Otherwise, you will become little more than an impulsive gambler and likely a very poor one at that. That is the best advice I think I can come up with for potentially acting "smart" in today's markets.

 

Thanks for reading and I hope I didn't totally bore you with all that.

 

Happy Trading

 

P.S. For those who felt the above was a little off topic, please do not confuse "simple" with "easy". Trading is simple, meaning price can only go up, down or sideways. However, even though it is simple at first glance, it is anything but easy. The trick is to learn how to jump in as price moves up or down (not sideways) and then jump back out with a profit before it changes its mind. If you think that is easy then you clearly have never traded real money for more than a few days. Will you be one of the not so smart traders who needs loads of indicator based, after the fact confirmations before you jump in or will you be one of the very few smart traders who has learned market structure and price flow and uses market profile, volume profile, support and resistance pivots or other real time buy and sell pressure information to time your trades? The choice is up to you and it can be as simple or as complex as you wish to make it. The real pros swear that simple strategies are best and I happen to think they are right.

 

Good luck to you

[Kiwi 16]

Good post ezduzzit,

 

Two little added bits of wisdom borrowed from others, one about risk and the other about approach.

 

Risk: Its important to distinguish the type of risk when entering a position. Risk can relate to the certainty that price will move where you expect it if you anticipate at prior support and resistance. Risk can relate to how much room you have to give a position to chop back and forth if you wait for confirmation from either a breakout or an indicator. Bigger traders tend to have to take the first type of risk.

 

Approach (from Lescor on ET): The three goals of trading, in order of importance.

1. Preserve capital

2. Earn consistent returns

3. Earn large returns.

The 'rule' part is - don't try to skip any steps.

[ezduzzit 10]

Interesting comments you posted there from Lescor on ET. When in doubt, I would simply say always focus on his goal # 1, preserve your capital !

 

Happy Trading

[Soultrader 12]

Great post like always ezduzzit. Alot of experience in your words. Very powerful.

 

I myself have committed every possible mistake when I was struggling as a new trader. I tried applying complex strategies using multiple indicators, memorized every single price pattern known to man. I even studied about exit points based on the height of formation: example... the height of the neckline to the head (in a head-n-shoulders pattern) is the projected target point after the break of the neckline.

 

After confusing myself tenfolds and losing thousands of dollars I finally decided to stick with one simple method and stick to it. I found pivots and market profile but could not trade profitably for quite some time. This was because I did not understand how to use them successfully. After thorough practice I was able to find my own style using these tools. This has worked for me which is why I tend to get carried away about saying lagging indicators are useless.

 

Trading should be simple. Most professional traders I know will even say trading is easy. But what pro's forget at times is the amount of hours of observation and practice spent to make trading easy. A professional trader and a new trader see the same information. We just process it differently. This only comes from years of trading.

 

Soultrader