KISS (Keep it simple stupid) ... but make sure you still have an edge

Discussion in 'Psychology' started by alex.samant, Jun 4, 2007.

  1. One of the oldest adages of Wall Street is KISS (Keep it simple stupid). Another one is that irrespective of your method, psychology and money management are more important.

    The two above are true. However, most of the people, in their ignorance, are not using them at the right time, in the right circumstance.

    Keeping it simple does not mean you should keep it simple to the point that you don't have a technical edge anymore. One thing should be known: the shorter term oriented you get, the more complex and sound the technicalities get. It's one thing to drive a car: you need a speedometer and rpm meter, gearbox, mirrors and off you go. When you are flying a plane (the comparison to day-trading) and everything moves fast, plus you got no concrete below you, you need more. You need an altimeter and a bunch of other very valuable flight tools. You can't keep it simple in a plane, or at least not when you have no experience...

    This is just as with trading. Consider the fact that when you are on an intraday chart, all your indicators should use the (H+L+C)/3 base for the calculation, instead of the classic Close. Why? Because nobody gives a damn what the value was when the 1hour bar closed. This is also leading to the conclusion that indicators that natively take the close into comparison, like the RSI, Stochastic, Williams %R are useless intraday.

    So, you keep it simple conceptually, visually, but underneath, you got a whole army of details set up so that you can be consistent. Charting software that lets you program stuff so you can identify visually, like coloring bars, adjusting indicator calculation and the such is vital.

    This gives you an edge. It's logical to see now, that without these adjustments, on intraday charts, you simply don't have an edge.

    Coming down to the second adage, about psychology and money management being more important than technicals... well... this is completely not true. Some people say that at some point you realize that whatever you use, even a simple moving average system, is good when you consider money management and psychology. At some point you should be concerned about performance. As long as that is on your mind, you should be able to come up with something better and more flexible than a simple moving average system. However, you should be comfortable with what you have. Although some people disregard the Holy Grail concept, there are things that are very close to it. As a performance seeking individual, you should aim at uncovering those grails and then adding sound money management and psychology on top of them.

    Only when you understand these 2 adages and the dangers they pose in the path of your becoming a professional, will you be safely saying that you have an edge.
  2. fubar


    Or you could study Jack Hershey's complicated unprofitable method for 12 months and have just enough money left over to buy the packet of razor blades
    comagnum likes this.
  3. Big AAPL

    Big AAPL

    Mr. fubar:

    That...was hilarious
  4. expiated



    With the knowledge I have presently, I should think it would not be all that difficult to devise an extremely simple set of guidelines to use for trading successfully, which is what I’m going to attempt here. At this time I’m anticipating that my main question will be whether this set of rules will offer enough trade opportunities to match my preference for frequency of transactions.

    RULE ONE: Limit your trading activity to those times when the weekly and daily trends are both in alignment/agreement.

    RULE TWO: Wait for the exchange rate to enter the half of the 15-minute (intermediate) simple moving average envelope that is AWAY from (on the opposite side of) the direction of the trend so that the asset has plenty of room to move in your favor.

    RULE THREE: Enter a position in the direction of the daily and weekly trends as soon as the exchange rate reverses direction to join the predominate price trajectory, as indicated by a hook in the fast simple moving average trend line and confirmed by a crossing of the slow simple moving average trend line.

    NOTE: Because of the impreciseness of the MT4 platform you are using, you’ll need to set the stop loss on short positions at 10 pips, which will unfortunately yield a 1:2 reward-to-risk ratio if and when you are seeking your minimum 5 pips profit.

    However, when entering long positions, it is safe to go ahead and set your stop loss and take profit targets such that the reward-to-risk ratio is 1:1.

    Either way, this should not present a problem provided that your daily success rate vacillates between 80% - 100%, and there is probably no reason why it shouldn’t.
    Last edited: Feb 19, 2018
  5. expiated


    ScreenHunter_7239 Feb. 19 13.09.jpg
    According to the above rules, I should only be trading CADJPY, CHFJPY, EURJPY, and/or GBPJPY at this time.
  6. expiated


    I was stopped out of all four of the above positions. Yet immediately afterward, I made about 11 trades in a row that all yielded almost immediate profits, without my having to wait hours and hours and hours before things finally went my way. I didn’t even bother with trying to time them correctly since I was busy doing something else at the time.

    ScreenHunter_7240 Feb. 19 18.25.jpg

    So hang the above “trading with the trend” methodology. The following extremely simple rules will be written for the “trade the reversal zones” strategy instead…

    RULE ONE: Limit your trading activity to those times when the exchange rate has ventured beyond the X.XX% deviation level of the XX-period simple moving average envelope.

    RULE TWO: Enter a position when the exchange rate reverses direction to head back toward the mean, as indicated by a hook in the fast simple moving average trend line on a one-minute chart, and confirmed by a crossing of the slow simple moving average trend line on a one-minute chart.

    RULE THREE: Use a setting of 10 pips for your stop loss and take profit targets. (If you wish to be conservative, you might opt to make such trades only when their direction is aligned with that of the overall weekly and daily trends.)
  7. expiated


    The weekly trend is a bit irrelevant when it comes to intraday trading, and the day-to-day trend is somewhere lagging. More and more I’m finding that the 15-minute (intermediate) trend is what is central to my purpose—what everything else is best measured against.
  8. expiated


    I made two major errors today, but have hopefully implemented the appropriate corrections to bring my new setup combining elements from my oldest and newest charts that much closer to constituting a bug-free system. The “keep it simple stupid” adjustments can be concisely stated as: only enter positions when price has positioned itself properly after pulling back behind the three key (and similarly aligned) simple moving averages. It’s kind of like trading the reversal zones within the trend and is essentially the same thing Nick McDonald of Trade with Precision does, except that I don’t use his settings/parameters, nor do I have sixteen requisite conditions that must also be met, which I think I’ve heard him mention.

    ScreenHunter_7248 Feb. 21 11.35.jpg

    Even with the blunders, this was a profitable day of demo trading. The stock trading contest outfit was quicker this time about mailing out my prize money, so I’ll be going to the post office today to mail it to Allied Bank, and hopefully be able to begin trading Forex pairs live via OANDA next week.

    ScreenHunter_7250 Feb. 21 11.36.jpg

    Given that I anticipate executing only a few trades per day as opposed to 35, it is my intention to limit myself to entering only those positions evidencing the greatest potential for yielding success—hopefully resulting in a 100% daily success rate more often than not, God willing.
    Last edited: Feb 21, 2018
  9. expiated


    ScreenHunter_7251 Feb. 21 16.53.jpg

    All three of the trades executed so far today unfolded exactly as anticipated, so hopefully this is a good sign.

    For the purpose of describing the corresponding rules, the three simple moving average envelopes listed from least to greatest value will be referred to as Envelope A, Envelope B, and Envelope C; and the three key simple moving averages listed from the least to greatest value will be referred to as SMA 1, SMA 2, and SMA 3. Here are the rules as of this hour:

    Overarching Rule: Trades may only be made in the direction of the day-to-day trend!

    1. All three moving averages must have the same trajectory, and must correspond with the bias/sentiment indicator in the lower panel.
    2. Price must, at a minimum, pull back to the first level of statistical support/resistance as represented by the inner band of Envelope A. (There is no objective methodology, at this point, for determining whether this will constitute the fullest extent of the pullback or not. Traders will have to make an educated guess, based on the nature/behavior of price action, as to whether to enter a position now, or wait to see if price pulls back even farther.)
    3. When placing an order, set the take-profit target at the opposite end of the current candlestick at a distance equal to the size of an average candlestick. (These rules apply to 15-minute charts).
    4. Set the stop loss such that the reward-to-risk ratio will be no less than (approximately) 1:1.
    All three of the above trades fell into the category of TRADE SETUP A and hit their targets within 15 minutes. This works well for me in that I: (1) hate drawdowns; (2) very much dislike sitting around for hours waiting for my targets to be hit; (3) wish to be able to pocket my profits on a daily basis; and (4) would rather not find myself having to remain in any trades overnight.

    It is permissible to execute a trade, even if all three moving averages are not aligned, provided the following is true…
    1. The bias indicator in the lower panel and SMA 3 both reflect the same sentiment.
    2. The exchange rate pulls back—at the very least—to the SECOND level of statistical support/resistance as represented by the OUTER band of Envelope A. Also acceptable is the exchange rate pulling back to the level of statistical support/resistance represented by the upper or lower band (as appropriate) belonging to Envelope B.
    3. Do NOT execute a trade however when the bias/sentiment indicator in the lower panel is suggesting that price might be initiating a full-fledged intraday reversal—obviously—unless you have…
    It is also okay to execute a trade when the bias/sentiment indicator in the lower panel is reflecting a wholesale reversal in the intraday trend provided that the exchange rate is located in the general vicinity of the most extreme support/resistance levels as represented by the upper or lower bands (as appropriate) of Envelope C…or when the wholesale intraday reversal is realigning the exchange rate’s trajectory with that of the day-to-day trend as represented by SMA 3.

    Definitely test the success of executing trades when BOTH the lower panel indicator (intraday bias) AND the day-to-day trend (SMA 3) appear of be reversing direction SIMULTANEOUSLY!

    (I wasn’t anticipating four setups when I sat down to type this entry. Now the rules don’t sound so simple anymore, but when you actually see the charts, the rules sort of become self-evident.)
    Last edited: Feb 21, 2018
  10. expiated


    TRADE SETUP A is only working most of the time—not all of the time. Try the following rules in its place, which will also happen to replace TRADE SETUP B as well:
    1. Watch for the short-term trend to pull back to the “wrong” side of SMA 1 during periods when SMA 2, SMA 3, and the lower panel indicator are all three aligned.
    2. Enter a position when the short-term trend hooks back toward SMA 1.
    3. Set the stop loss at 1st level support/resistance as represented by the inner band of Envelope A located opposite the trend. (This is a theoretical setting. Due to the inaccuracy of the platform, in practical terms, the stop loss will need to be a minimum of 10 pips.)
    4. If trading ambitiously, set the take profit target at 2nd level support/resistance as represented by the outer band of Envelope A located on the side of the envelope matching the direction of the trend, or if trading conservatively, simply set the take profit target to match the size of the stop loss.
    #10     Feb 22, 2018