SCOTT WELSH TRADING BLOG

The Battle of Simple v. Complex

The Battle of Simple v. Complex

July 7, 2021

In the battle of simple versus complex, they’re both wrong.

In coaching, complex almost never works.

Yet we still hear a famous coach on national TV say things like, “You know, on the deuce side, his return goes crosscourt 71% of the time, so get your split-step early and take your forehand down the line with small margin and remember to watch his backhand grip on the run; if you see a grip change move to cover the crosscourt with a quick cross-step but look to roll back crosscourt if he chips down the line, which he does 54% of the time…”

Yikes.

But simple almost never works either.

I’ve heard a lot of pros and people on TV say banalities like “You have to hit a thousand balls” and “Be mentally tough” and “Bend your knees”. That seems simple…and is completely un-helpful.

The same is true for trading.

There are systems out there touted by famous traders that talk about “harmonics” or “cycle theory” or “infinite impulse response filters”. It’s interesting and obviously has a lot of brain power behind it.

But what am I supposed to do with an infinite impulse response filter?

Even more, when you hear about such complexity, you think, “It’s complicated but it must make a boatload of money”. Why else would anyone bother spending a bunch of time learning something so complicated?

These systems don’t make a boatload of money, though. The ones I’ve seen return 5-15% per year. At best.

What is all that complexity for?

But simple systems don’t work either.  Just buying a moving average cross up and selling an MA cross down is not useful. Something that simple will either make money with massive amounts of drawdown or not make money at all.

So where does that leave us?

The solution is the Einstein quote from Monday’s Newsletter. Make things as simple as possible, but no simpler.

If you study very complex strategies, you’ll see that many of the elements are superfluous. If you look deeper into those strategies, you can ignore the complex and get the same returns.

Or much better.

In a complex system, usually the idea behind it is what counts. You can take that idea and cut out the rest.

If we have a breakout strategy that looks to ignore trades in a semi-flat regime change while checking the trend on multiple time frames while sizing position according to volatility while trailing the stop by a standard deviation of ATR, how much of that is not needed?

Almost all of it.

But the idea is great.

Here’s an example.

Buy when RSI (length 2) goes Overbought (above 70) and use an 8-day timed exit on a Daily chart (opposite for Shorts). Stop is 260 pips. No harmonics or cycle theory. Just buying breakouts and letting it run for a week and a half (with “emergency” profit targets of 1000 and 650 pips on Longs and Shorts, respectively).

Here’s the Equity Curve on GBPJPY since 2018:

What if we took the ideas of simple and actionable and combined it with the ideas behind complex breakout systems?

Would that be simple, but no simpler?

We’ll investigate further in our next Newsletter.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.