One of the biggest struggles that many traders deal with is over-complicating a simple strategy. Some of the most profitable strategies are ridiculously simple, but many quantitative traders have a hard time believing that something simple could actually work.
Nat Stewart from NAS Trading wrote a post that breaks down the reasons why people will attempt to over-complicate their trading systems. He explains that many traders simply struggle to understand how a simple strategy that anyone can understand could actually be profitable.
He also suggests that many traders are guilty of assuming that more complex strategies are better. If a strategy takes more effort for us to understand, it is natural for us to believe that it must be better. Despite the fact that “better” is a completely relative term.
The Japanese Yen Example
The first example that Nat uses to explain his point is the move the took place in Japanese Yen from late 2012 through the spring of 2013. He explains that this long-term trade produced huge profits for many traders, but many critics suggested that the move was too obvious.
The lesson that Nat takes from this case study is that traders should focus exclusively on bottom line profit. If you are worried about how sophisticated your strategy is, you will surely miss opportunities available to traders who are simple following the price.
The Doughnut Vault Example
The next example that Nat discusses is a small doughnut shop located in Chicago that regularly has a line around the block.
According to Nat, the owner of the doughnut shop has stated that its simple operation is far more profitable than the full service restaurants that he also owns. Here we see another example of simple profit outperforming complexity.
The Martial Arts Example
The final example Nat brings up is taken from the world of martial arts.
He explains that many martial arts schools teach “complex, ‘sophisticated,’ or flashy moves” just to make newer students believe that the instructors know what they are talking about. However, in actual practice, simple and direct moves are almost always more effective.
This example has an obvious connection to overcomplicated trader education services.
Nat’s Ridiculously Simple Strategy
After providing those interesting examples about simplicity, Nat went on to discuss what he described as “one of the simplest swing trading strategies.”
Nat’s simple swing trading strategy enters a long position when the closing price is lower than the closing price from six days ago. It then holds that position until the closing price is greater than the closing price from six days earlier. That is it.
In order to prove his point, Nat backtested the strategy trading S&P 500 futures contracts. The $1,000,000 account more than tripled in value from 1998 through 2013. The strategy produced a win rate of 70% and an average profit of $193.
Nat concludes by conceding that the concept of simple is easier said than done:
In fairness “simple” is not really that simple. The right kind of simplicity, in the right amount at the right time, is what creates the genius of a great artwork, a great business or great trading strategy.
Comparing great trading strategies to great artwork and great business is a very interesting idea. While simple concepts can be great in any field, they have to be simple in the right place at the right time.