Here is your second lesson…. over-complication. Why don’t I start with
a quote from a master:
Everything should be made as simple as
possible, but not simpler. – Albert Einstein
I could not have said it better. Another reason why traders fail is
over-complication. The human brain is amazing; it’s able to understand
complicated and intricate principles but sometimes unable to see the
simple and obvious. Even worse, often when someone is shown the
simple and obvious way to do something, they won’t do it!
For some crazy reason people love sexy indicators and fancy strategies.
They also love to complicate their lives. I don’t know how many times I’ve
seen or heard someone say they have some new indicator that will
revolutionize trading.
The trading world is full of people who’ve embarked on a journey for
magic indicators only to come back with a handful of sand. I’m going
to let you in on a little secret… there is no secrets to trading, and anyone
who says there is, is full of it.
I have seen people spend huge amounts of time creating custom
indicators that when back-tested do nothing better than indicators
that are already available. Why are they no better? Well, one good
reason is that many are derived from the same source (price) and
they all tell you where the price is compared to where it was in the
past. I’m still waiting for someone to come up with the magic indicator
to tell me where price is GOING TO GO. I’m just kidding there, but it
seems that’s what some people are out there trying to do.
Another big issue I’ve seen which is quite common is traders adding
more and more indicators, oscillators and chart overlays to try and get
a “better picture” or “more confirmation.” I’ve never seen a successful
trader with his/her screen loaded up like this…ever.
But hey, if you think more is better and provides better confirmation
then why not add the kitchen sink too? I hope you see where I’m going
with this.
An important rule in trading: the more complicated your system is the
less chance it will work. This also goes for back-testing and creating
systems, (See the note below for the definition of back-testing) often
complicated systems suffer from curve fitting and are unrealistic for
real trading. If you have some experience with creating and testing
systems, then I’m not telling you anything new. It really is a double
whammy, not only do they not work as well, they are harder and more
complicated to follow and learn.
This is why we keep our method of trading at Traders International so
simple.
Note: Back-testing definition- the process of testing a trading strategy
on prior time periods. Instead of applying a strategy for the time period
forward, which could take years, a trader can do a simulation of his or
her trading strategy on relevant past data in order to gauge its
effectiveness.
Don’t forget! If you don’t know what e-minis are, I will explain everything
about them during the live trading sessions)
Click here to register for our live trading sessions.
Till next time…happy trading,
Todd