Simple Vs Complex Trading Strategies: The Simpler The Better Approach
Simple vs complex trading strategies have a clear winner: Simple trading strategies trump complex trading strategies. Trading needs to be simple and easy. Our aim is to build and create simple automated trading strategies and trading edges that you can use in your trading. You need just a few variables in your trading strategies. Street smarts trump book smarts in trading. In this article, we explain simple vs complex trading strategies (simple trading vs complex trading).
Simple trading strategies with few variables or parameters trump complex strategies. Complex strategies are more likely to go wrong. Instead, try to create many strategies that complement each other. Less is more in trading!
The power of simple trading strategies
Many believe in complexity.
The more complex and the more advanced, the better. In everyday life, we are used to for example seeing “advanced course in xyz”.
Fortunately, complexity has no place in trading. Finding trading strategies isn’t about how complex things you build, but rather how you can brainstorm a lot of simple ideas. Go for a walk, get ideas, form a hypothesis, backtest it on a computer, and conclude.
Yes, markets are complex, very complex. But (perhaps) counterintuitive, it makes sense to solve complex problems with simplicity.
Do you need exceptional coding skills? No
Do you need computing power? Yes, but not much.
Do you need complex formulas? No.
The power of finding ideas to test comes with experience. Once an experienced trader has the minimum information and capacity necessary to form a hypothesis, getting additional variables into the hypothesis generally does not improve the accuracy of his or her hypothesis.
Quite the contrary, additional complexity does, however, lead to overconfidence and curve-fitting. The trader gets more confident in his or her abilities to predict, but overconfidence bias is a pretty well-documented bias. See the graph further down in the article.
The focus should be on how to overcome your biases, avoid your weaknesses, and build on your strengths.
In trading, it pays to remove variables, not add
The two researchers hypothesized that there might be a psychological explanation: when faced with a problem, people tend to select solutions that involve adding new elements rather than taking existing components away.
Did you know that the removal of traffic lights and road signs leads to fewer accidents? Why is it that we always want to add more complexity to a solution? Why don’t we remove items of information when solving a problem? Why don’t we remove laws and regulations to solve problems? Why do we add legislation instead of removing it?
I recently came across an interesting article in Scientific American written by Diana Kwon called Our Brain Typically Overlooks This Brilliant Problem-Solving Strategy. The article explains how we can remove element