Trading with a plan is essential in investing. You may call it a trading system or rule based trading, either description is still based on a plan.
Any business that is going to succeed needs a plan and the discipline to follow it. There are many reasons that businesses fail, but among the top reason is the lack of a plan.
A plan should be clear and simple. Simplicity is essential to allow everyone to follow it. A straightforward plan will allow anyone to measure whether the components of the plan have been followed. A Systematic Trading Plan that is simple to follow with rules uncomplicated to understand that can be replicated over and over can bring the success all portfolio managers are seeking.
The benefit of a technical indicator or pattern used in a trading plan is that it contains an absolute value that is simple and can be agreed upon by all using it. A vague statement like “moving higher” is indistinct. It leaves too much to interpretation. A simple description of “3 days which the close is higher than the previous close for 3 consecutive days” is simple to understand. It is easy to insert the formula “3 days which the close is higher than the previous close for 3 consecutive days” into an Excel spreadsheet of system analysis software program. “A computer cannot think any better than a submarine can swim.” There are inputs needed for a computer to test a theory. A submarine needs a series of processes to keep it moving.
Albert Einstein is the one that said “Everything should be made as simple as possible, but no simpler. It is a great explanation of “K-I-S-S”. Keep It Simple, Stupid” The “K-I-S-S” approach was designed to allow non technical personnel in the field to work on equipment and machinery.
Leonardo Da Vinci said “Simplicity is the ultimate sophistication”
Another way to say it is “It seems that perfection is reached not when there is nothing left to add, but when there is nothing left to take away”.
When writing systematic trading plans, if I can obtain a similar entry and exit point with a simple indicator or a very complicated one, my choice is always the simple one.
If I am writing a swing trading system, I have a number of indicators like RSI, Stochastics, CCI, reverse moving averages, as well as pattern recognition patterns. All of these will give roughly the same entry and exit point.
If I am designing a Trend Following trading system, either a moving average, two moving average systems, triple moving average systems, Turtle breakouts, MACD, Directional Movement Indicators all will produce entry and exit signals very close to each other.
Keeping it simple is a great approach to trading and life.
For more information on systematic trading and rule based trading plans for any index or ETF, contact mark@seleznovcapitaladvisors.com or visit www.seleznovcapitaladvisors.com
