As far as I am concerned, successful trading can be very simple, but, by that, I don't mean to suggest that it is easy. I am constantly amazed by the trading talks I've heard and the concepts avowed that involve endless complexities.
It is my opinion that far too many traders fail or at least fail to succeed because they try to make their trading too complex. I agree that it is important to have rules by which to trade because that introduces discipline to the trading, but I don't believe those rules need to be particularly complex. In fact, with the prior history of coaching students who later come to me I have frequently seen their previous trading go from pretty good to not so hot as they began to add layer upon layer of complexity. My advice in those situations often is to keep your trading simple but if you want more complexity go study nuclear physics.
Unfortunately keeping it simple can be very hard to do. I know of traders, for example, who have developed a very successful trading methodology, but they persist in day trading different strategies that break even or lose money because they feel they need to be doing something else. Someone once suggested that they followed that pattern because it seemed so easy just to make money with a simple strategy that worked and they felt some element of guilt so they expended more effort even though it was not financially productive. Logically, of course, that makes little sense, but psychologically there is probably something to it. When we step back and think about it, after all, the markets well may be more about the psychological than the logical.
I guess it would only be fair to ask me what I mean by making trading simple. In "Trade Your Way to Wealth" I've discussed in depth the creation of an individual's personal trading plan. It includes money management. One thing that each trader should do in my view is have some specific plan of how much to assign to each trade. There are several ways to do that as discussed in "Trade Your Way to Wealth" and the works of other authors. None is terribly complex, but it is important to pick one. After the method of money management is decided a trader might establish a minimum reward to risk that must appear before any trade will be entered. Finally, an exit and entry strategy should be chosen and, in my estimation, in that order. For example, a trader with a longer time horizon might decide that he will use a 50 day moving average as both initial entry and initial exit. If the share price crosses above the 50 day MA he might decide to buy the stock and will use a cross below the same 50 day as the exit. He might continue the trade for a short or very long time, but the method of exit is in place; a cross below the moving average.
Is such a strategy the best? No one can ever tell until a trade is finished, but it is simple and it can be effective. One problem with moving average entries and exits is that one can get whipsawed when a stock is trading in a relatively tight range. Another is that the exit becomes pretty far away if using a fairly long term moving average like the 50, but once there has been a move in the right direction the trader can then use Part B of his plan and move stops up to attempt to protect additional profit.
Anyway, there is an example of simplicity. 1. Money management plan 2. Reward to risk requirement 3. Initial exit/entry strategy 4. Method to move exit strategy in direction of move. Now, off to nuclear physics class.
by Bill Kraft, Editor
Copyright 2009, Makin' Hay, Inc.
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