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Keeping things simple in your trading

Beanieville posted Don’t Let All Those Technical Analysis Gurus Confuse You on Tuesday with the primary suggestion being that one should keep things simple by avoiding derivatives and leverage, and a secondary one to keep your analysis relatively simple. The title obviously only applies to that second point, but I think the general message that less complexity is better for most traders is a good one.

In particular, there’s a quote that goes:

“If you’ve been to some options or futures trading sites most of you probably feel like you don’t belong because of all apparently sophisticated analysis of the market, with so many trendlines and so many indicators you never heard of.”

I’m going to agree with the part about all the lines and indicators all over charts. I see it all the time, even among my professional colleagues. If that’s what works for them, fine, but I’m definitely not a fan. The charts I look at are simple, without all kinds of trendlines, Fibonacci retracement levels, Elliott Wave counts, oscilators and all that. To me the rest of it is clutter which serves no other purpose than to distract and obscure the important part – what prices are doing.

Now, having said that, the idea that options and futures traders are the main culprits here is just plain wrong. I’ve seen stock traders with some of the most intense charts ever. Market complexity does not necessarily equate to analysis complexity. It’s a personal thing for each individual trader. I’ll leave it to them to decide what’s best for them in the end.

The other contention made by Beanieville is that traders should avoid options and futures and leverage (which I presume would include forex as well). I’m mixed in this one.

On the one side, I’ve answered a lot of questions about leverage and margin from confused traders. For many folks it would be best to stick to simpler markets at first, until they have a solid grasp of things from that perspective before taking on leveraged trading.

That said, there are plenty of folks who quickly grasp futures and options and such. I have no problem with them starting in the perceived deep end of the pool, as long as they have a healthy appreciation for the risk side of the equation.

The bottom line for me is that different people are going to be best suited to trade different instruments. Keeping them from trading in that fashion virtually guarantess they perform below their potential.

By John

Author of The Essentials of Trading

3 replies on “Keeping things simple in your trading”

Trading is a exciting but hard to expect that much. Well if you are a veteran in the trading line you would know that even in down times, there are opportunities to make. You need to know a system that can help you do this.

Hi John,

Nice to meet you and I frequent your site on an occasional basis. I like your analysis and I do agree with your last paragraph that different people could be suited for different instruments or else they might underperform. However, that only applies to a very extremely tiny fraction of traders – especially those excellent traders who might benefit with using leverage such as options/futures/forex. But for most people, delving into this even riskier arena will only increase their chance of failure. By far, most people should not get involved with leverage. The appeal to them is big fast money; unfortunately, for the majority of them it means constantly blowing up their accounts. Note that because I’ve discovered an extraordinary approach to the stock market … I feel even more strongly that 99% of people should stay away from leverage.

The idea that 99% of traders should stay away from leverage must be tossed aside for the simple fact that some markets inherently use leverage. My statement in the post about some folks being best suited to trading certain ways wasn’t about maximizing profits through leverage. It was about them trading certain markets where leverage is part of the deal. Forex is one such market where all trading is leveraged. Commodities is another. Of course folks can participate in those markets via ETFs, but the majority of participants are in the actual markets (which remain the most liquid), not the ETFs – some of which are leveraged as well.

The idea that 99% of traders should stay away from leverage also implies that said 99% cannot manage risk. I will definitely grant that the reason for a high percentage of trader failures is poor risk control, but that’s something which impacts non-leveraged traders as well as leveraged ones (granted, traders using leverage can do a bit more damage faster than those without). Since traders in all markets and all leverage levels are able to act in a responsible fashion with regards to risk, I’m not going to accept that leverage = bad trading.

The bottom line is that regardless of whether you trade with leverage or without, you need to manage your risk. Having an “extraordinary approach” doesn’t change that.

Note: I deleted a bit of blatant promotion from the above comment.