Sunday, April 20, 2014

Rage against the machine(s)

With the advent of computers, then electronic trading, and subsequently the internet and social media, some people would have you believe that the act of trading has become much more difficult than in the days of people like Bernard Baruch, Jesse Livermore and the like.

There are hedge funds out there who literally use rocket scientists to create sophisticated alogrithms, all dedicated to trying to find an edge. The trend (excuse the pun) seems to be towards more and more complicated systems.

Where will this all end?

There is no doubt that individual traders cannot complete with the complexity of those systems used by the big beasts of the trading world. So, what can we do?

I've always been a proponent of the KISS principle (keep it simple, stupid!). Quite often, in trading and life in general, simplicity is better. Less can be more.

The simpler your basic theories or rules, the better. Most of the successful trend followers over several decades had rules that literally could be written on the back of a cigarette packet.

There is a school of thought that says the basic systems and theories of those famous traders of the past would no longer work in today's markets. 

Well, the last time I looked, the price of a stock or commodity can still only do one of three things - go up, go down or go sideways. That hasn't changed.

While increases in trading volumes, and the proliferation of shorter term or day traders and the resulting increase in volatility or 'noise' need to be considered, the core principles have remained the same.

Trends still appear in markets. And trend followers still seek to profit from two of those three price scenarios.

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