‘Sometimes the questions are complicated and the answers are simple.’ This is one of my favorite quotes. You may think this pithy 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. 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 simple answers. This can only happen when we step outside ourselves and look at the challenges objectively, not letting our judgement become clouded with our own personal beliefs and biases. What I still find fascinating is that the biggest obstacle to succeeding is not finding the simple answers, but the inability of human beings to follow through with positive thoughts and actions in the pursuit of clearly defined goals.
In the financial arena people tend to do the same. First, they tend to over-complicate trading. They analyze all sorts of sophisticated data; from technical indicators and news related events to complex trading models and, more often than not, end up with mediocre results.
If you have ever had the opportunity to talk with a trader that has had any degree of success and ask them what they do, most of them will tell you that they implement a simple, clear, proven strategy. They focus on being consistent and executing 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 their strategy produced consistent results they would never even think about deviating from their methodology. This is unlike the vast majority of unsuccessful traders who are constantly trying the latest fad in technique 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. That’s just what most of you have been lead to believe. 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. What never changes in the market, however, is the fact that the lowest risk entry points in any market is where prices have turned in the past.
The simple fact is that trading is about putting money at risk and expecting that a proportional reward should be realized if done 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 I can find. By doing this I know that I will lose on some trades and win on others. As long as I have the discipline to take the trades, keep my losses small and the winners at least five times the risk, in the end I will come out ahead. That is the simple answer to what can be a complicated question.