As quantitative traders, we are naturally inclined to make our trading systems more complicated than they need to be. Tinkering with adding different components attempting to find slight improvements is just what we do.
While that passionate pursuit of improvement has likely paid dividends in other aspects of our lives, it can sabotage our trading systems. We are generally better off to trade simpler systems with great discipline. Of course, that is easier said than done.
There was a post published at Systematic Relative Strength that addressed the benefits of focusing on a simple relative strength system. While the relative strength part could be switched out for any other simple indicator, the principle behind the post is important.
The post starts by addressing the idea that no matter what simple strategy you choose, you have to actually use it:
One of the ongoing difficulties for investors is finding some kind of simple method for investing. Relative strength is just such a simple method. Even simple methods, however, have to be applied!
The post continues to argue the importance of simple systems rather than complicated ones:
If you can’t follow a method because it is too complex and if you bail in panic during the first downturn, you’re not going to succeed with any method.
So we want to avoid complex systems because they will be more difficult to follow during downturns. That is a good point, but their next point is even better:
Simple systems are generally more robust than complex systems, and relative strength is about as simple as you can get. Relative strength is not an optimized system—like most simple systems, it will make plenty of mistakes but its simplicity makes it robust.
Ironically, we want to find a system that makes mistakes. That way we know it has the ability to overcome them. That type of robustness is what gives us confidence that the system will be able to handle a Black Swan event.
Human nature, I think, makes it difficult to follow any system, whether simple or complex, so discipline is also required. Investors will improve their chances for success with a simple, robust methodology and the discipline to stick with it.
It seems like so many quantitative traders are forcing themselves to try to invent a better mouse trap. Why bother when the ones that we already have can get the job done?
In order to develop a profitable trading strategy, we need to have the discipline to stick to our system when the going gets tough. That can be done easier with a simpler system.