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More Complicated Is Not Synonymous with More Profitable

There is no doubt that you will be tempted many times to use more complicated trading systems. You will be tempted to build more and more rules into your system, feeling, erroneously, that your system will work better if it has more rules. You may feel that if your system takes more market variables into consideration, you will trade more profitably. My experience strongly suggests otherwise. With the exception of artificial intelligence-based systems that can process vast amounts of data in exceedingly complex ways by relating data to market patterns and relationships, adding new inputs or variables to your own analytical techniques does not necessarily improve them and may in fact cause them to deteriorate.

I have found that if there is a relationship between complexity of system and profitability of system, then it may well be an inverse relationship. The simpler a system is, the more likely it is to be profitable. So, please, don't confuse apparent complexity with profitability.

The Danger of Market Myths

Be careful what you believe. Be careful whom you believe. Be careful what you read. Be careful who influences you. The markets are forever subject to the emotional influence of traders. Through the years traders have come to believe that certain relationships exist in the markets when in fact these relationships do not exist at all. Statistically, few consistent market relationships have persisted over many years. Therefore, be careful not to get caught up in the cycle of hope that perpetuates market myths.

In this respect, you must also be careful about the information you allow to filter into your unconscious mind. The lure of fantastic claims and outstanding new discoveries about trading will always be there to play with your insecure side. Don't give in to any of these claims. If your systems are making you money, then don't look for greener pastures. This does not mean that you cannot or should not engage in ongoing research. But remember that there is a big difference between productive and objective research and emotional response to a claim. Should you be attracted by a claim, a system, or a promising indicator, test it before you use it.

The Dangers of Pyramiding

Pyramiding is the act of adding increasingly larger units to your position as a market moves in your favor. Therefore, you may begin by buying one unit and adding two additional units once the trade has moved in your favor. If the trade continues to move in your favor, you may add four new units, and then, assuming that it continues in your favor, you might add six or eight units. The upside of this methodology is that you will accumulate a very large position consistent with the trend and you will use the capital available in open profits to margin new positions.

The danger of pyramiding is that this is a pyramid clearly built upside down. It is heaviest at the top and rests on only one unit at the bottom. It is therefore subject to violent collapse at the slightest indication of a trend reversal. If you intend to build a pyramid, then do so by establishing your largest position first and follow it up by successively smaller numbers of units.