Let’s look at the first step, which will allow you to combine your trading strategy with a financial instrument for speculation. Many steps of this algorithm can also be applicable to investment strategies.
Task
Make your strategy as simple as possible.
More details
It doesn’t matter whether we are talking about a speculative or investment strategy, the system must include a minimum number of parameters. It should be as simple as a hammer. You don’t need 10 indicators and a complex algorithm for harmonizing them with each other.
Explanation
Firstly, a large number of indicators or parameters constantly produce multidirectional signals, which makes it impossible to make a specific decision.
Everything is simple if you focus on a couple of parameters. Buy when both are looking up and sell when both are looking down. If you have 10 indicators, then they all point in different directions at different times with different lags. It’s just a mess. Even a computer with artificial intelligence cannot sort it out.
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Secondly, a complex system reacts very sensitively to all market changes, thus quickly becoming useless. By complicating your strategy, you reduce its lifespan. The simpler the system, the longer it will be able to generate profits, and the less painfully it will survive a bad market.
In short, you have three options:
- You enter and exit the market using a simple system. If the system is profitable, you are great. Your account will increase.
- You apply a complex strategy in the market. Not good. Even if the system is good, it will not last long.
- You make transactions in the market without any system. In this case, your account is doomed.
Example
Many people write about the deplorable state of Chinese stocks and the real estate market. The fact is that over the past 5 years, the Hang Seng index has fallen by half, including by a third over the last year.
They write about the Chinese authorities who are considering creating a stabilization fund of 2 trillion yuan ($278 billion) to support Chinese shares.
It is also about the liquidation of China Evergrande Group, setting off a daunting process to carve up one of the biggest casualties of a property crisis.
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Meanwhile, I remember very well the times when world markets closely monitored the state of the Chinese economy on a daily basis. In those days, the stock markets of Western countries fell at the slightest bad news about China.
Now there is no trace of this correlation. Look at the DJIA, NASDAQ Composite, S&P 500 indices, and the indices of European countries. Many of them are at their maximum!
Now imagine that your strategy takes many things into account, including China. This system would have stopped working long ago, even if it was good before.
Of course, this is a very large-scale example. But this emphasizes the idea that simplicity gives the system not only reliability but also durability.