“If you NEED trading to be complicated or complex, stop reading now and definitely don’t come to one of my classes!” – Rick Wright
“If a strategy sounds complicated, it likely does not work.” – Sam Seiden
It’s unthinkable that many traders use complicated methods to trade. Some traders combine several pieces of expensive charting software and indicators together, thinking that it would enable them to make more accurate trades. They forget that they’d hardly achieve over 50% accuracy on a long-term basis. A combination of several indicators and complicated trading ideas doesn’t improve the stats. This combination would only cause analysis paralysis. You might be deceiving yourself that you have a higher hit rate with your trading system. This is illusory. If a coin was tossed endlessly, the long-term share between heads and tails would be a well balanced 50/50. But there’ll be times when heads would remain ahead several months long or the other way round. You may get a head several times in a row, then a few times a tail, and then many times a head; making you to conclude that you got a better hit rate. But ultimately, the hit rate would level out at 50%
Each indicator has a different way of generating signals and when most of them finally agree, the winning edge is likely gone. Generally when you combine several indicators and look for a million reasons to enter a position, you’re making your trading life unnecessarily hard.
A single moment’s carelessness or psychological weakness on the part of a trader may ruin the work performed during an entire trading day or even a whole week. Basically a trader trades his account and not the market. Consequently, he should always keep an eye on the volatility of his account. During drawdowns position sizing must be reduced drastically. Only that way can a trader get through bad patches and ensure his long-term survival. This has nothing to do with how you make your trading decisions, but it has a lot to do with how you manage your risk.
How can a trader gain over 250% in a short time, only to have up to 85% drawdown in his trading portfolio within another short period of time? The answer is that the person doesn’t know about effective position sizing and risk management. Plus he/she may be using excessive leverage indiscriminately. Mike Kulej, a maverick of the financial markets, explains that brokers overplay the availability of leverage. They manage to point out advantages, but not the risks. Leverage itself will not make anybody better trader, it will only magnify losses and gains. In addition, trading with high leverage adds to the already highly emotional nature of this activity. It is natural that a trader wants to make as much money as possible, but before using leverage, one should prove it to him/herself that the account is actually growing.
I’d suggest trading with very small position size.
I once said that your chart needn’t look like a Michelangelo’s painting before you can make better trades. In one of my coming articles, I’ll show you how thousands of pips can be made from trading with only one indicator. I even know one popular and permanently successful funds manager who doesn’t use any indicators: he only follows the trend he sees on the charts. The truth is that it’s thru safe and sensible position sizing and risk management that we meet our trading objectives, not thru complicated analyses that supposedly give us entry signals.
Please clean up your charts, and thus make life considerably easier for yourself. If you need to know whether the market is moving up or down or sideways, simply look at your chart. You don’t need fancy indicators to tell you if a chart is trending or not, all you need to know is contained in the price action itself.
NB: Please watch out for my coming articles with these titles: ‘Worst-case Scenarios’, ‘Effective Swing Trading In Forex’, ‘Advanced Gap Trading’, ‘Resist The Lure Of High Risk (Part 2)’, ‘Developing The Right Attitude Towards Losses’, ‘3 Recent Gap Trades,’ ‘Trading For A Livelihood,’ etc.
I’d like to conclude this article with more quotes from Mike Kulej:
1. “Incidentally, all types of technical analysis will have good and bad times. Does not matter what indicator, pattern or charting method is used, nothing is 100% correct. The trick is to not to get discouraged during losing periods, which are sure to happen.”
2. “This may sound old and worn out, but always use stops. You will not get mega rich in a day, yet can go broke in one if, a stop is not in place… Preserve your capital.”
Your questions and opinions are highly welcome.
With best regards,
Forex Signals Strategist, Funds Manager &Coach
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