Keep it Simple and … Smart

Keep it Simple and … Smart
By Benny Lee, Chief Market Strategist, NextView Investors Education Group

You would be surprised find that many successful traders do not have advanced knowledge or a PHD in analyzing charts to make trading decisions. Many traders who have acquired professional certificates or degrees in finance and investing may be good analysts but failed when they start to trade. Many are engrossed in techniques and ideas and have forgotten the bottom line – making money from trading.

The objective of every trader (including investors) is to make money on a consistent basis. Many traders still think that their trading decisions should be correct all the time. Of course, not every trade or trading day or even trading month is going to be profitable. This is simply the nature of trading. There is no one successful trader who has not lost any money before in their trades. Keeping it simple can go a long way toward changing the traders’ mindsets about trading so that they can start to trade successfully and make money consistently.

A trader can make hundreds of possible trades during the course of a trading day or week. However, how many of these are your setups. A setup is a set of rule or rules to make the trading decision. How many of these setups have you traded in the past and how many are you intimately familiar with? Getting familiar with the set ups means that you know the characteristics of the set up, i.e. its advantages and disadvantages.

Your set up should be easy to understand and not complicated. Many traders think that putting in more rules and advanced ideas makes a better setup. Most of the time, it leads to confusion. Have simple trading rules in your setup, as long as the rules are able to minimize your trading decision risk by getting a clear picture of what the market is telling you.

Trade only a few setups, 1 to 3 is plenty. You cannot possibly trade every setup or even identify them in a real-time environment, unless you have programmed your setups in automated trading systems. Even that said, you may not have the money to trade all the setups. Furthermore, many setups can also be in opposing directions leading to even greater confusion.

Choose a few setups that you are most comfortable with and profitable (with the highest reward to risk ratio and low drawdowns). Stick with those and ignore all the others. Trade the setups that provide clear and obvious visual recognition. When choosing the setups that you want to trade, select the ones that can easily be identified visually.

Become intimately familiar with your setups. Reducing the number of setups of your trade will allow you to understand how they act, when they are likely to set up and when they are likely to fail. You will have an idea of the expected outcome whenever you make that trading decision. A good trader knows why he lose a trade.

Many traders often let their emotions take over their trading decisions. I have experienced losing a trade and then wanting to take revenge by trying to trade using my instinct. Of course, that will eventually lead to more losing trades. If you do not have a setup, wait. If your setup does not trigger, wait for the next one, even if it takes hours, days or even weeks, depending on the setup that you have. Exercise patience and discipline while waiting for your setup to trigger.

Losses often occur not because of a poor entry, but because the trader did not have the confidence of what he or she saw and allowed a small volatility in the market to take him or her out or, even worse, refused to take the stop loss that the trader had set because of a failed setup.

By trading fewer setups and becoming comfortable with them, you will be able to plan the trade ahead of time and develop much greater confidence in your trading.

The Advantages to Keeping It Simple… and Smart
First, good entries become profitable trades because the trader has confidence in the setup and will not be shaken out at the first bit of market noise. The trader understands the consequences of making that trading decision and would expect how the trade will react to these market noises because of the previous experience.

Second, the trader has become familiar with the setups so that the trader can quickly and easily identify when the setup has failed, exit and limit losses. The trader is able to accept losses because he or she knows that this is part of the plan and if he or she continues to follow the plan using the set ups, he or she will eventually make money from the market after a period of time.

Third, with this newfound trust and confidence that comes with following fewer setups, the trader is less inclined to chase setups that he or she is not familiar with and does not fully understand because the trader knows “his” or “her” setups will be profitable.

The Bottom Line for Your Trading
If your trading method is complicated or requires too much evaluation in real time, you will hesitate before entering and not trust it while in the trade. In the end, you will not follow your own method, which is equivalent to having no trading method at all.

Do not analyze during the market. Sometimes when a setup is triggered, the trader starts to analyze further using other indicators or setups because he or she just do not have enough confidence and do not want to lose on that trade.

Simple strategies work best because they allow you to trade with confidence, and, if you trade with confidence, you are one step closer to eliminating the emotion of fear in your trading.


Benny Lee is a trainer, trader and practitioner of technical analysis. He conducts Technical Analysis workshops, seminars and courses for private and professional investors, traders, remisiers and fund managers in Malaysia, Singapore and Thailand. For more of his articles, please visit: Benny Lee's column )


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Comments: Any investing system should be simple and easy to follow and implement. The system should be applied consistently and can be shown to be productive over a long period. The above article has so many ifs and buts.