Trading strategy – discipline over complexity

With investing, as with life... Source: Google Images

With investing, as with life… Source: Google Images

First of all, a confession: I’m becoming a Twitter junkie.  Maybe it’s due to being alone most of the day, but the trading community on Twitter is fantastic.  So I enjoy indulging in various conversations around market events and trading philosophy.  Anyone interested can find me at @financialpiggy8

So.  One of the Twitter conversations of late has been around HFT scamming, and included some pretty senior folks in the finance space.  The worries are around what data HFTs get versus the ‘average’ guy, and what that might cost us as individual investors.  Beyond the actual data feeds, I mused on some related issues/generalities:

  • Trading strategies follow Occam’s Razor: in general, simpler strategies are more robust.  At least, that’s what I have found trading at a variety of different time frames.  I think many folks unaccustomed to trading believe there’s tremendous complexity in what traders’ strategies contain.
  • Key to trading = discipline: I struggle with keeping discipline.  I’m completely in agreement with several fellow traders on Twitter that espouse the less-interesting parts of being a trader.  Namely, consistency towards rules.  It’s no accident that many traders fail due to strategy neglect – trading too large/too small, ignoring entry/exit signals, etc.  The prime example of a successful trader is someone with a solid routine, hopefully with no emotions attached.  Hence the following point.
  • Automated trading = automated discipline: seeing as I have pretty bad discipline (in my opinion), I outsource the discipline to my computer.  Now my weakness is pretty much limited to turning off the system when I shouldn’t (to wit: I have turned off the system far too many times; each time has been costly, in terms of missed opportunity).
  • The bigger picture – why we pay financial advisors/fund managers:  people like me – interested in markets, anxious to overtrade, etc. – can also impose discipline by paying an advisor or fund manager to make all decisions.  I can say with full confidence that, for many people, the 1% charged by a financial advisor is well worth the market tracking error compared to managing/overtrading their own assets.  We can debate whether other options are a better deal here (e.g. robo-advisors charge less for the similar effect, as could diversified ETFs held forever), but the point is to stay away from self-destructive overtrading or overcomplicating matters.

In sum: the more complicated a trading strategy, likely the worse it will perform in future.  Discipline is crucial in trading, as with investing.  If you can’t keep discipline, consider hiring someone/some computer to make decisions on your behalf.

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