The success of a trading strategy doesn’t necessarily depend on its complexity. Learn to choose the style most suited to your personality.
Jim Simons is a math professor and the billionaire founder of Renaissance Technologies, one of the biggest hedge funds in the world. His fund places trades based upon highly complicated, proprietary mathematical equations and algorithms. Jim Rogers is also a billionaire, famous for founding the Quantum Fund with George Soros. Rogers has said of his technique for trading markets: “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.”
The stark contrast in styles between these two financial heavyweights illustrates a problem that the average trader might have to wrestle with at some point: What type of methodology is better for you—complex or simple?
One of the best things you can do to determine your trading style is to take an honest and open assessment of your personality type. Often, we think that we should be trading in a way that fits the image of how we see ourselves, instead of how we really are, and that can lead to less than desirable results.
Are you a detail-oriented person who enjoys managing processes, or do you prefer to focus mostly on the big picture? Are you more analytical or creative in the way you think? Are you a rule follower or do you like to use your own judgment in assessing situations? The answers to these questions might help you develop a trading style that works best for you.
Sometimes all you need to do is look at your chosen profession for clues to your personality type.
Airline pilots and engineers must follow very specific rules and procedures in their daily lives. If they don’t, people can die. So a complex, rule-based trading system reinforced by backtesting may feel familiar and comfortable for them. On the other hand, if you’re an artist or a craftsperson who works with subjective shapes and structures that require your personal touch for completion, you might favor a simpler style of trading.
Complex trading systems are often driven by data—and tons of it. Some of this data can feel cold and impersonal. One approach to trading that can seem like dry, boring data to one trader, and at the same time look like an unfolding story line of adventure to another trader, is technical analysis with indicators such as support and resistance levels, moving averages, and pattern recognition. If you often feel your head is about to explode when you get hit with information overload, or if you’re more visually oriented, you may find the colorful charts and traditional terms of technical analysis appealing..
If you trade on a regular basis, you will likely encounter periods in which nothing seems to go your way. How do you respond during those times? If the certainty of established rules and procedures gives you comfort and allows you to keep a level head when everyone else around you is panicking, then a complex trading approach may be the ticket. If not, then a set of basic trading rules intending to prevent you from getting over your skis may be your approach.
In terms of complexity, there’s no right or wrong amount to employ. And it may take a bit of trial and error before you figure out what style works best for you.
But simple or complex, one key part of a sound trading methodology is robust risk management. Many traders say you have to be able to stay in the game even when a trades goes against you, and the basics of a trading plan like position sizing and risk management, along with understanding when the risk/reward ratio may not be in your favor can help you stay in the game long enough to fine-tune your system as needed.
It’s just that simple … or complex.
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