Today's Innerworth column is worth copying and pasting, and so I did. Here it is. ____________________________________________________ Drawn to Complexity: When Keeping it Simple is Better In the mid 1980s, Steve Wozniak, the creator of the Apple II computer, was asked about the future of computing. Interestingly, in hindsight, he said he thought people were making too much of the home, or personal, computer. He said that many simple tasks, such as organizing one's recipes, are better left to an old-fashioned card file, rather than using a complex computer program. He made his point by recalling an incident that happened when he returned to college to earn his BSEE degree. He took along an Apple II, but he spent more time using it to do tasks that he could have done more easily with a less complex method. Now, Steve didn't anticipate the widespread popularity of the Internet, and computers these days can do tasks more easily than those of even a decade ago. But there's a solid lesson in this anecdote: Sometimes complexity is a distraction and it's much better to keep things simple. In these modern times, we seem to be drawn to technology and to the complexity it may bring. But is technology and complexity always better? For example, do we really need to store our appointments and address book on a PDA? Is it really more efficient? When it comes to trading, technology has indeed helped. Real time charts are useful for analysis, and it's vital to have summary data of current market conditions immediately available. But seasoned traders warn not to get too wrapped up in all the complexity. Many seasoned traders note that one can just look at price and volume and make huge profits in the markets, which is quite the opposite of what one might think after having read popular trading magazines touting overly complex indicators. For anyone who aced introductory statistics in college, some of the "statistical" indicators presented in trading books and magazines seem unnecessarily complicated. It's as if someone went out and made up complicated formulae to impress people who equate complexity with innovation. There are numerous examples of common indicators that summarize basic market information, yet seem unnecessarily complex, but let's look at how even a seemingly simple indicator should be examined in even more basic terms. Take the simple moving average, for example. What is an average, or mean? What does it do? It does nothing more than describe the "center" of a distribution. The first lesson a statistics professor teaches is that the mean is only a good measure of central tendency when there are no outliers or extreme scores. An extreme score biases the mean. In other words, if there is a big price spike anywhere in the series of prices that go into the average, it will bias the estimate. The lesson: Remember what a mean is, and thus a moving average, and keep in mind that it is doing nothing more that summarizing a series of prices. Also keep in mind that under certain conditions, the mean is a fallible measure of central tendency. Thus, when you look at a moving average, always look at the basic information that went into its calculation. Remember to move to the chart at a higher timeframe to see the actual time points that were used to calculate that average. Don't get overly wrapped up in all the complexity. The point is that when looking at any statistic, such as a simple moving average, it's important to remember that it is doing nothing more than summarizing basic price information. Don't think that a statistical indicator does something magical. With all the complex indicators out there, it's easy to believe, however, that some indicators are magic. But all any indicator does is describe a series of numbers. It is useful to remember a basic data analytic principle: Look at the original values that went into calculating the summary statistic. Don't focus only on the summary statistic itself. And also remember that complex isn't always better. Many times it is useful to keep things simple.
I do think simpler is better, and more complexity doesn't necessarily add value. However, when I looked around and saw 10 legal pads and several cell phones, I decided I'd better do the PDA thing, just to have it all in one place.
A common technique in the world of sales and marketing is to sell a product or service of dubbious value by repackaging it as something complicated. People are drawn - innately it seems - to the more complicated explanation, solution, device etc. and rarely question the basis of supposed superiority if the basis of the claim is difficult to unravel. These behaviours once recognized can be used to your advantage. If someone pitches a wonderful complicated solution you should always be skeptical and look for hard data to support the claims. Now, there are some arenas where an economically advantaged solution has a complex basis. However, the hallmark of such a truly valuable technique, product etc. is that proof of its advantage can be easily stated and demonstrated and the details can be drilled down one logical level after another until the uninitiated person has a clear picture of how and why the idea has merit.
http://www.europhysicsnews.com/full/13/article5/article5.html Plectics: The study of simplicity and complexity Murray Gell-Mann, Santa Fe Institute, Santa Fe, USA [and Nobel Prize laureate] The subject that I call plectics is the study of simplicity and complexity. At the Santa Fe Institute, which I helped to start, we deal to a great extent with matters of simplicity and complexity. I arrived at the name, plectics, in the following way. The word "complex" comes from plexus, originally meaning braided, and com-, meaning together, hence braided together. "Simple" comes in a similar way from roots meaning once folded; and the Latin words for "braided" and "folded" both owe their ultimate origin to the Indo-European root *plek-. In Greek, that root gives rise to plektos, meaning braided. So, in using the word plectics we are describing the subject of simplicity and complexity without committing ourselves as to whether we are talking about something simple (once folded) or something complex (braided together). [...] Apparent and effective complexities Take, for example, the energy levels of atomic nuclei. The rules for those energy levels look, at first sight, as if they are very complicated, but we now believe that they are obtained from a couple of simple physical theories: quantum electrodynamics (the quantum field theory of electromagnetic interactions) and quantum chromodynamics (the quantum field theory of quarks and gluons). We believe that if you put these two together you will get a description of atomic nuclei in great detail, including the positions of all their energy levels. But the computations are extremely long and difficult on our existing computers, using known methods, and most of them haven¹t even been done yet. So here is a case where we are looking at something apparently complex that has in fact low effective complexity, but a lot of logical depth. In other words, a short program is involved, but that program is associated with a very long computation time.
I affirm that the complexity of market is apparent complexity and low effective complexity because information is packed in a rather short string see my article here http://www.elitetrader.com/vb/showthread.php?s=&threadid=24706 Information packing, transcription and alternative splicing: A biological cell is composed of proteins which are themselves composed of amino-acids. Let's pretend that these proteins are the analogs of the swings in market and amino-acids the analogs of waves which subdivide a swing. The cell doesn't contain the proteins at its birth but fabrics them. For that it uses an information which is coded not in the same form than proteins but in the form of DNA which is a double string of paired bases of nucleotides. By analogy, in our model, market somehow coded its information in a double-string which is our base and projection lines where each segment are the analogs of amino-acids composing the DNA, and where each point are also paired like in DNA bases - we call them "Duals" in our model. Moreover, for organisation purpose, the DNA is not a floating chain, it is folded by packing it into some proteins structures called histones. In the same manner our model shows that market waves are also condensed into a compact form that needs to be unfolded to be used. This stage is called transcription. This is done through the rules for interpreting our model. This transcription is not unique: depending on where the DNA is read this can give birth to different proteins sequences: this is called alternative splicing. By analogy depending on where the market opens different market waves can be generated with the same static structure revealed by the model.
Great thread. It took me years to figure this out - and practice it - but once I did, my trading improved substantially!!! I have been profitable for years thanks to simple methods.
PM me and I will be happy to give you info about how I trade. I don't want to get off-topic of this thread. Suffice it to say, simple is always better, IMO. PM me...
Would one of the simple methods be "not revealing the simple methods that work", so that others couldn't ruin it?