Seven Deadly Trading Mistakes - Part Six

Seven Deadly Trading Mistakes - Part Six
by: Harvey Walsh

Mistake Number Six - Overcomplicating It

It's easy to get caught up in the details, but if we take a step back for a moment, trading really need not be complicated at all. Finding a strategy to work with can take as long or short a time as you like - there are plenty available off the shelf (including within my own course, naturally!) Formalising that strategy into a written personal trading plan is something that requires only a couple of hours of time up front - after that it can be refined and added to as you go along.

So already we see that very quickly we can get to the stage where we are ready to begin simulated or "paper" trading. And it's at this stage where lots of traders really start to overcomplicate matters.

If you remember back a few weeks ago in the first lesson, I talked about strategy jumping. A close relative of that particular problem, is strategy morphing. The cycle is very similar indeed. The trader starts trading their plan with all good intentions. Things may or may not go well straight away, but sooner or later as the markets behaviour ebbs and flows with and against the strategy's strengths and weaknesses, losing trades will inevitably occur.

At this point, the strategy-morpher gets scared. They don't like to give money back to the market, so they decide to try and modify the system to filter out trades like that last losing one. They begin to add indicators to charts, coming up with new ever more convoluted combinations, furiously testing to see what cuts out the most bad signals whilst leaving in place the good ones. A few times round this loop and their chart starts to resemble something a siezemologist might be more used to seeing than a price chart!

I'm not saying that modifying and testing of new systems and ideas isn't valid, but when it's done at the expense of trading an already profitable system, the trader ends up chasing his own tail, and loses out in the long run.

Remember that every strategy will have losing trades. When those losses are within the normal expectations of the system, there is no need to start fiddling. Stick with it and as long as the system has positive expectancy, the law of averages will see you through those drawdown periods and you will make money. Paper trading the system thoroughly beforehand will give you the faith in the setups to be able to do this.

Markets are complicated, but trading them need not be. Simple really is the best policy. A simple system makes for easier to spot entries and exits, a less stressful trading day, and consequently a less stressed and more profitable trader. Almost all of the successful traders I know have found this out the hard way, by trying the complicated route first.

Action: To avoid mistake number six, you actually need to do *less* work. Put in a little effort up front in the planning stages, and then relax and just follow your plan to the letter. Thinking too much can damage your trading, not to mention your stress levels!

Great stuff as always!!

Saint