Simple things work

Extremely simple things work in the market. But that is true of life in general. However most of us are addicted to complexities. Simple things like earnings breakout, earning momentum, price momentum, deep value, earnings acceleration etc. work.

Given a simple idea, most traders first instinct is to make it complicated. Add more indicators, more scans, more patterns, more elaborate multi factor equity selection models and the works. Instead of trading breakouts on high probability equities, they want to enter even before that, thinking that they will find some miracle system to get them in before breakout.

After reading some of the earning lead breakouts kind of examples I have talked about like TRT, SHR, BWLD, GROW etc, a trader has been exchanging emails with me for past few days. I explained to him why those plays work and why entry after the earning is best. After few back and forth, his point is but if he can get in before the earning then he will benefit from the 20 to 50% pop on day of earning. Now he has got in to some extremely complicated models to predict such events.

Some people love complexity. They have 30 different scans they run. They have 24 different chart patterns they monitor. They have at least 10 indicators on charts. They daily monitor some 15 different market indicators like Vix and so on. All this complexity gives them a feeling of control.

Look at all these traders who obsessively monitor GDP of USA and 200 other countries, get orgasmic about M3, are excited on days of inflation data release. They monitor everything and what is the end result. I can bet none of this helps them in their trading.

Modern corporations and modern life is full of complexities. Complexities leads to increased cost and poor decision making.

One of the companies I worked for had such and elaborate and complex budget making process that in most years the managers would spend six months doing budgets. The spreadsheets used for budget making were so intricately linked as complexities increased that one mistake some where would involve going trough 78 linked spreadsheets (needless to say each one of those 78 had furter linkages). The rate card had 27 different prices, which no one used, but it was faithfully printed and circulated and billing soft wares built to handles 27 prices.

So when I taught a strategy and perspective management course , I always use to insist on simple easy to understand one page analysis of complex management problems and 200 page plus case studies.For most MBAs complexity and jargon is engineered in to their DNA. In fact all you learn in most MBA schools is how to make complex presentations, graphic slides, and invent complex jargon for simple things. I always use to tell the students make it easy for me to understand. So much so that they started calling me "easyguru" behind my back.

As a trader if you want profitable systems just keep it simple. Avoid the first temptation to add more variables. Simpler the system, more profitable you will be.Complexity is not a profitable strategy. If you can not explain your strategy to 5 year old in easy language, you don't have a strategy.