Custom Search

More complicated is not necessarily synonymous with more profitable

ВрThere 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 profВэitably. My experience strongly suggests otherwise. With the exception of artificial-intelligence-based systems which can process vast amounts of data in exceedingly complex ways, 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 sysВэtem and profitability of system, then it may well be an inverse relationВэship. The simpler a system is, the more likely it is to be profitable. So please, don't confuse apparent complexity with profitability.

17. Beware of market myths. The markets are forever subject to the emoВэtional 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 relaВэtionships have persisted over many years. Therefore, be careful not to get caught up in the cycle of hope which perpetuates market myths.

18. Beware 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 it continues in your favor you might add six or eight units. The essence of pyramiding is that increasingly larger positions are added as the trade moves in your favor. 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 establishВэing your largest position first and follow it up by successively smaller numbers of units.