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Back to the Basics


Back to the Basics


Every day, we get faster computers, smaller iPods, and cell phones with more functions. Humans are drawn to complexity. Complexity is associated with progress. And progress makes us feel safe, and even powerful and omnipotent at times. But complexity can also be a distraction. It's much better to keep things simple.

When it comes to trading, technology has indeed helped. Real time charts are useful for analysis, and it's vital to have summary data of current market conditions immediately available. Could you imagine drawing charts with a pencil, a ruler, and graph paper? But seasoned traders warn not to become overly consumed with complexity. For example, Mark Douglas in "Trading In the Zone" argues that novice traders focus on complex trading strategies to avoid taking risks, jumping into trading, and honing their trading skills. You can convince yourself that you are indeed learning how to trade by studying new and more complex trading methods. You're studying and learning, right? But are you really learning how to trade? You aren't taking risks. You aren't studying the markets. In a way, by studying complex indicators, rather than making real trades, you are stagnating. You aren't moving forward. It's like trying to read a book about tennis and thinking that you'll play like a champion without ever stepping foot on the court. It doesn't work that way. It's necessary to actively trade the markets.

Many seasoned traders argue that they can merely look at price and volume and make huge profits in the markets, which is quite the opposite of what one might think after having read popular trading books and magazines that tout overly complex indicators. There's nothing magical about a complex indicator. Some novice traders look at too many indicators. Some are redundant, and many times, an indicator may not do what you expect. For example, indicators can't forecast the future. For example, a stock may show momentum, but "momentum" as used in trading is merely an analogy. It's not like physics. In the natural world, when an object is put into motion, it remains in motion. But when a stock seems to build momentum, it may not continue. An indicator merely describes the past, and the past only forecasts the future accurately when it does. So don't mistakenly believe that a complex indicator can give you an infallible window into the future. The markets don't always act the way you expect, and your success depends on you remembering that the markets are inherently complex. This complexity cannot be fully captured by any indicator. With all the complex indicators out there, it's easy to believe that some indicators are magic. Complexity isn't always better. Many times it is useful to keep things simple.