“Everything should be made as simple as possible, but not simpler.” Albert Einstein.
If you haven’t heard of it the acronym K.I.S.S. stands for Keep It Simple Stupid. This acronym is as applicable to the field of trading the markets as it is to any. The Keep It Simple Principle works best when activities are kept simple rather than made complex, therefore simplicity is the key goal and complexity should be avoided.
So why do people over complicate the approach to trading?
All too often traders and investors set out on the path of good intentions but sooner or later the market’s short term random behaviour challenges any strategy’s strengths and weaknesses. Whilst this market behaviour is accepted as inevitable, traders tend to over complicate the trading approach as they seek to solve the unsolvable problem of short term randomness, usually on the run in the heat of the moment.
Understandably nobody enjoys giving money back to the market, but rather than accept that it is part and parcel of trading a stress-tested edge, traders mostly decide to try and modify the strategy to filter out the losing trades. They begin to tinker, try new found indicators and use ever more complicated combinations as they feverishly look to analyse away the ‘bad’ signals from the strategy, resulting in a quagmire of indecision and chaos. The problem is that the price patterns for a ‘bad’ trade can look exactly the same as the price patterns for a ‘good’ trade so ‘good’ trades will also being analysed away.
I’m not saying that modifying and testing new concepts isn’t valid but when it’s done in the heat of the moment at the expense of an already profitable stress-tested system then the trader ends up greatly reducing the existing edge. Remember that every strategy will have a series of winning and losing trades. This combination is built into the edge. If this is accepted, stick with it.
When is enough, enough?
At some stage you just have to say enough is enough. Forget about listening to economists, media outlets’ stock picks, advertising by large fund managers that “time in the market” is the only way, brokers’ picks, story writers about a secret stock, and scrupulous marketers. Find yourself a system that has an edge and work towards building personalised processes that deliver the consistency and objectivity that will keep the activity of trading simple, focused, methodical and repeatable.
Think about the simplicity of McDonald’s restaurants for a minute and how they have adopted a true K.I.S.S approach. Their business systems allow their 1 million plus employees in over 31,000 franchised restaurants to efficiently deliver a consistent consumer product – wherever you are in the world your experience is very similar at a McDonalds restaurant. McDonald’s are said to serve 68 million customers a day and the McDonald’s system at the coal face is executed by a team of low skilled youthful employees.
There is absolutely no discretion used by any employees and managers are tasked with ensuring that the team implement the proven processes of the McDonald’s system without any discretion. It took massive effort to create the McDonalds processes but once in place they pay for themselves over and over again. The McDonald’s processes are an excellent example of solving complex logistical problems with simple processes whilst also keeping the customer experience simple and consistent.
You need to McDonaldise your trading
The definition of ‘process’ is “a series of actions or steps taken to achieve an end.” By definition this implies methodical and repeatable.
Quite simply, every investor needs to McDonaldise their trading. I’ve spent years training people on the markets and I am convinced that traders and investors need two pillars to simplify trading in order to achieve the success of protecting capital and outperforming the market benchmarks on an ongoing basis.
If you are going to trade the edge yourself, which is what the majority of investors do, then you need a third pillar, the necessary mindset to trade the edge.
I have written much on the psychology of trading on these Blog pages. As soon as you have attachment to the outcome of the process the necessary psychology required to follow the processes to achieve the edge skyrocket.
This is because we are so frail and full of fear of losing, being wrong or missing out. We put huge importance on our personal value based on the individual outcomes. The low skilled teenager would have no attachment to outcomes, he/she would just trust the process they were trained to follow. They put no importance on the outcome of the process, they put huge importance on how well they follow the process because they trust that the outcome will be satisfactory if they just follow the process. You might want to manage this teenager which, like the McDonalds manager, would simply involve you ensuring he/she followed the trading processes.
“The problem is that most overestimate the importance of events (outcomes) and underestimate the power of processes. We want quick fixes….. Don’t get me wrong. I appreciate events. They can be effective catalysts. But if you want lasting improvement, if you want power, then rely on processes.” John Maxwell
Markets are complicated, but trading them need not be. How simple are your investing processes? Can they be executed in 10 – 15 minutes a day?
If they rely on hours of reading stories from newsletters or annual reports or fund managers reports or brokers’ recommendations or pouring over charts or watching TV programs or reading the daily financial press or magazines then I would suggest they are not simple nor consistent nor objective and that they require an enormous amount of knowledge, discretion and skill to execute. Is this how you want to spend the rest of your investing career?
Once again the importance of an up to date trading plan comes to the fore. With all of the recent changes to the SPA3 system do you have a sample trading plan than now takes all of this into account?
Response to Comment by Frank:
Yes we do, in our Members’ Zone.
I suppose you have read nearly every book on trading everv written , but do you remember the interview with Richard Dennis by Jack Schwagger in Mareket Wizzards? Or perhaps it was in Michael Covel’s book The Complete Turtle Trader. Richard Dennis said that if he published his trading system in the Wall Street Journal, nobody would mnake money with it because the minute they hit a string of losses, they would loose faith in the system, and start doing something else.
It takes more than your above words can impart to create a rock hard belief in a system. I believe in your SPA3 system, but only because the beliefs I hold are exactly in accordance with your stated beliefs, and am totally convinced there is no other way to consistently make profits, and because I have spent years reading and thinking and trading, and developing rules based systems, reducing them to mathematical formulas, and computer back testing them, not a few times, but thousands of times, then analysing the results, looking to see if it is possible to truly replicate the results in real time, taking the good, discarding the bad, and moving forward.
How else can you come to have a rock solid faith in a system. I believe the philosophy and rules Richard Dennis and Bill Eckardt taught their traders are very much the rules that you adhere to, and they showed me the way forward. And Richard Dennis developed those rules for himself to make the transition from floor trading when he left the CBOT Pits, so he could trade multiple markets away from the pits.
Investors/Traders are heavily influenced by the nagging suspicion that the result of every trade is in fact random, and so to counteract it they believe that if they put enough indicators on the screen, the balance of probabilities will swing in their favor. Then they start simplifying their system, and in the end get dissappointed that nothing works, and what can they do now. Then, if they have the stomach still for it, they start to really develop rules, but that is more than an intellectual exercise, that is a really hard road to travel, as you and I both know.
I recently had reason to write to an old friend about trading, and have reproduced it for you below this comment. If you have the time to read it, I think you may see some things in it you may not have thought about before.
I apologise for the length of my comment, and realise you are a very busy person, so if you don’t read all of this, I won’t be offended. But I thought the reasoning I gave my friend concerning why being a brilliant chess, backgammon and poker player did not help him to become a profitable trader is worth taking 5 minutes to read.
Response to Comment by Mike:
Thank you for these wise words.
I agree, a transition process is required which, in essence, is a paradigm shift from one’s old dysfunctional beliefs to a new set of functional beliefs, wrt to trading.
For all followers of this Blog, we’ll be publishing Mike’s open letter in this week’s posting. It’s a beaut.