Simple vs complex trading strategies have a clear winner: Simple trading strategies trump complex trading strategies. Trading needs to be simple and easy. Our aim is to build and create simple automated trading strategies and trading edges that you can use in your trading. You need just a few variables in your trading strategies. Street smarts trump book smarts in trading. In this article, we explain simple vs complex trading strategies (simple trading vs complex trading).
Simple trading strategies with few variables or parameters trump complex strategies. Complex strategies are more likely to go wrong. Instead, try to create many strategies that complement each other. Less is more in trading!
The power of simple trading strategies
Many believe in complexity.
The more complex and the more advanced, the better. In everyday life, we are used to for example seeing “advanced course in xyz”.
Fortunately, complexity has no place in trading. Finding trading strategies isn’t about how complex things you build, but rather how you can brainstorm a lot of simple ideas. Go for a walk, get ideas, form a hypothesis, backtest it on a computer, and conclude.
Yes, markets are complex, very complex. But (perhaps) counterintuitive, it makes sense to solve complex problems with simplicity.
Do you need exceptional coding skills? No
Do you need computing power? Yes, but not much.
Do you need complex formulas? No.
The power of finding ideas to test comes with experience. Once an experienced trader has the minimum information and capacity necessary to form a hypothesis, getting additional variables into the hypothesis generally does not improve the accuracy of his or her hypothesis.
Quite the contrary, additional complexity does, however, lead to overconfidence and curve-fitting. The trader gets more confident in his or her abilities to predict, but overconfidence bias is a pretty well-documented bias. See the graph further down in the article.
The focus should be on how to overcome your biases, avoid your weaknesses, and build on your strengths.
In trading, it pays to remove variables, not add
The two researchers hypothesized that there might be a psychological explanation: when faced with a problem, people tend to select solutions that involve adding new elements rather than taking existing components away.
Did you know that the removal of traffic lights and road signs leads to fewer accidents? Why is it that we always want to add more complexity to a solution? Why don’t we remove items of information when solving a problem? Why don’t we remove laws and regulations to solve problems? Why do we add legislation instead of removing it?
I recently came across an interesting article in Scientific American written by Diana Kwon called Our Brain Typically Overlooks This Brilliant Problem-Solving Strategy. The article explains how we can remove elements instead of adding and still get a better solution. Removing elements is for many a radical idea, but it shouldn’t be.
This is very relevant for traders and those interested in quantifying problems. Most of us make strategies based on many variables, yet it’s often the few and simple models that turn out to be both better and more reliable. Especially beginners believe they need to find something that is advanced to succeed. But it’s often the opposite. Profitable trading is more about finding simple strategies and following the plan. It doesn’t need to be the best or optimal plan, but the “simplest” plan that you are able to follow and execute.
Why is trading difficult?
Morgan Housel writes in the brilliant book The Psychology of Money that an engineer can have a successful career knowing not much else than engineering. The same goes for a veterinarian – he or she doesn’t need to know much else.
But in business, trading, and investing it’s not like this. Trading is a little math, psychology, game theory, history etc. Perhaps this doesn’t make it harder, but it certainly makes it much more prone to change and uncertainty. Imagine all the criteria you can put into a trading strategy! It’s endless.
Less is more in trading
Rory Sutherland wrote in his book Alchemy that bullshit multiplied by bullshit means bullshit squared. He’s right. The easiest and best solution in many cases is to remove information or criteria. A good quant makes things simple.
The chart below explains why Sutherland is right:
Once you have a minimum of information to form a judgment, it doesn’t improve the outcome by adding more information. Nassim Taleb once wrote that the easiest way to bankrupt a fool is to give him lots of information.
Jim Simons has made a fortune using quantified strategies in the markets, but in the book The Man Who Solved The Market the author argues the strategies are neither novel nor sophisticated.
Why do we make trading complicated?
Most likely we have an in-built bias toward complexity. This is what Diana Kwon writes in the article:
While the propensity for businesses and organizations to opt for complexity rather than simplification was previously known, the novelty of this paper is that it shows that people tend toward adding new features, “even when subtracting would clearly be better,” he adds. Meyvis also notes that other reasons for this effect may be a greater likelihood that additive solutions will be appreciated or the so-called sunk-cost bias, in which people continue investing in things for which time, money or effort has already been spent.
Curtis Faith on simple vs complex trading strategies:
Many have not heard about Curtis Faith, but he was one of the original “Turtle Traders” in Richard Dennis‘ successful trend-following project back in the 1980s. Mr. Faith has written one of the best trading books out there: an easy-to-read book about the most important aspects of trading. Here is Curtis’ view on complexity:
It takes a lot of time and study before one realizes just how simple trading is, but it takes many years of failure before most traders come to grips with how hard it can be to keep things simple and not lose sight of the basics (page 115)…..Keep it simple. Simple time tested methods that are well executed will beat fancy complicated methods every time (page 131)……In a similar manner, simple rules make systems more robust because those rules work in a greater variety of circumstances (page 212)…….People have a tendency to believe that complicated ideas are better than simple ones….Some of us thought that trading successfully couldn’t possibly be that simple; that there must be something else to it (page 224).
Complexity increases the risk of curve-fitting:
As Curtis Faith mentioned in his book, complex strategies increase the risk of curve-fitting. Simple systems are more robust because the rules work in a wider variety of circumstances.
Traders should keep in mind Occam’s Razor
William of Ockham (1285-1347) argues the simplest of two theories should always be preferred to a more complex one. This is something all traders should have in the back of their heads.
Simple strategies that work – what are simple strategies?
We have over the last ten years written plenty of both free and subscription-based trading strategies. There is, of course, no easy trading strategy as they require constant work and adaptions, but the idea behind it doesn’t need to be complicated.
You can find a link to trading strategies here:
- Free trading strategies
- Monthly trading edges (subscription)
Simple vs complex trading strategies -conclusion:
When we look to improve a trading problem, it’s natural to add more variables. However, that is often the wrong approach. By subtracting or removing variables you can improve the result and at the same time reduce the risk of curve fitting. Simple trading strategies beat complex strategies. Always keep this in mind when you are evaluating simple vs complex trading strategies.
Many sub-optimal strategies that might not be the best on their own, can increase the return of a portfolio of strategies:
– What is the key principle when it comes to choosing between simple and complex trading strategies?
The key principle is that simple trading strategies with few variables or parameters tend to outperform complex strategies. The focus is on building and creating simple automated trading strategies and trading edges with just a few variables.
– Why do simple trading strategies trump complex ones in the world of trading?
Simple trading strategies are more likely to be effective and less prone to going wrong. Complexity in trading can lead to overconfidence, curve-fitting, and increased risk. The aim is to create many simple strategies that complement each other, adhering to the principle that less is more in trading.
– What is the power of simple trading strategies, and how do they contribute to success in trading?
Simple trading strategies, despite the complexity of markets, offer a powerful approach. The emphasis is on brainstorming simple ideas, forming hypotheses, and backtesting them. The experience is key to finding effective and reliable strategies, and additional complexity often leads to overconfidence and curve-fitting.