“Sometimes the questions are complicated and the answers are simple,” is one of my favorite quotes. You may think this thoughtful saying comes from some literary giant like Shakespeare, Dickens or perhaps Mark Twain, but in fact it was Theodor Geisel, otherwise known as Dr. Seuss (who is no slouch when it comes to writing), that uttered this great quote. I love what this saying conveys as it relates to both life and trading. The fact is, that many of the most daunting challenges we face in life quite often can be resolved with very simple answers if we just step back and not let our judgement become clouded with our own personal biases. What I still find fascinating is that the biggest obstacle to succeeding is the inability to find the simple answers that quite often lead to resolving the major conflicts in our lives.
In the financial arena, people tend to over-complicate trading. They analyze all sorts of data, from technical indicators to news related events and use complex trading models. Even so, and more often than not they end up with mediocre results. If you have ever had the opportunity to ask a successful trader what they do, most of them will tell you that they implement a simple strategy, day in and day out. Additionally, the strategy they implement is very detailed, leaving little room for subjectivity. Another aspect to their success is that once they find that their strategy produces consistent results, they would never think about deviating from their strategy. This is unlike the vast majority of unsuccessful traders who are constantly trying the latest fad in trading techniques, or following the hottest guru of the day, in essence also searching for the silver bullet to riches.
I’m sure some of you are thinking that a strategy has to change because the markets are constantly changing; at least that’s what most of you have been led to believe. And yes, to some degree the markets do change. Levels of volatility increase and decrease, some markets go through extended periods of trending and so forth. But what never changes is the fact that the lowest risk entry points are found where prices are likely to turn. In other words, where supply and demand is most out of balance.
The simple fact is that trading is about putting money at risk and expecting a proportional reward. This simple equation should be realized if the right process is executed correctly. The fallacy that most people have been led to believe is that in order to obtain a big reward; they must take on a big risk. That couldn’t be further from the truth, in my humble opinion. Any trading strategy worth its salt must be devised around three simple tenets: low risk, high probability and high reward. This is the simple answer. Implementation, however, is extremely complicated.
When students ask me what indicators I use or what I look for to give me confirmation, I tell them that I just trade off the highest quality supply and demand levels that offer the biggest profit margins, and that’s it. If I do that consistently, I know that I will lose on some trades and win on others, but as long as I have the discipline to take the trades, keep my losses small and the winners at least five times as big, in the end I will come out ahead. That’s the simple answer to what can be a complicated question.
Until next time, I hope everyone has a great week.