The ability to simplify means to eliminate the unnecessary so
that the necessary may speak…
Hans Hofmann,
Introduction to the Bootstrap, 1993
E-mails from traders and investors of every ilk come to me daily. I am grateful, and urge you to keep them coming, as you inspire me, challenge me and force me to think. Everyone has a different way of being in the world and, as a logical corollary, in the markets. I get charts, graphs, opinions, links to articles, and more opinions. There has been so much speculation lately about what the Fed will or will not do and how it will affect precious metals and the dollar, that I must work hard to prevent my head from spinning, to keep it attached firmly to the neck area and to attempt to filter out the signal:noise ratio.”
Did I mention that people send me charts? They range from the utterly and overly simplistic, to something that might be considered a Rorschach test gone bad. I respect those who can trade from intensely complicated (to me anyway) charts that contain 10 or more different technical indicators plus at least three colors. If that is what works for your particular brain structure, then that is what works.
Over many years of trading and experimenting with more systems and indicators that I care to recall, I have come to the conclusion that, in trading, less is more. For my own purposes I like to see price, volume, and a couple of moving averages and then draw trend lines. For me, the simpler, the better. It helps me block out noise, obviates conflict when indicators are not in synch or are giving different messages, and allows me to be definitive with what I do.
Trader Alex (name changed to protect the innocent) sent me a batch of charts the other day. The charts were in several different time frames, and were loaded with so many indicators that I was barely able to make out what Alex wished to trade. Worse still, I could not figure out HOW Alex was trading. In this situation, one does the logical thing. One asks Alex. The response I got was quite revealing and, perhaps you can find a trading lesson in it.
Alex told me that he lived his life by making flow diagrams. Everything he did or planned to do, he diagrammed beforehand in order to prepare himself for any eventuality. For example, if he was invited to a party, he would do the following: starting a week before, he would map out (on paper) everything he had to do to prepare for the party, including selection of clothing, washing his car, telling selected people where he would be during those hours, finding out who would be at the party and how they would be dressed, how they would be arriving, how they would be mentally (good or bad moods), what they would be bringing to the host and hostess and on and on. Sometimes, he would wake up in the middle of the night to expand the flow diagram as new thoughts and possibilities crossed his mind. A day or two before the party, Alex began to be infused with doubt. Had he thought of everything? What could happen that he had not anticipated? Would be go into a state of social paralysis if someone was at the party whom he had not expected or if someone said something to him for which he did not have an answer? If you think this sounds a bit whacko, you are correct.
In Part 2, we will see how Alex carried his desire to be prepared for every possible eventuality in his life into his trading activities. And how these complicated measurements hampered his ability to actually make the trades he so conscientiously analyzed.
