The Minimalist Trader: INDICATOR ABUSE

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There is an epidemic sweeping the retail trading landscape that is positioned to swipe every last dollar from your trading accounts all in the name of “leveling the playing field” and it comes in various disguises. Computer and Internet technology have opened the door to aspiring traders in ways like never before in the history of world financial markets. But there is the very real risk of overdoing it.

The opiate of the trading masses is chart indicators and studies.

Floor traders have always had a reputation (earned for some, fiction for others) for drug abuse. In no way am I diminishing the negative long-term effects hard drugs have on ones physical, emotional, and financial health. But in many ways, the hallucinogenic effects created by the psychological lift a leading chart indicator provides have been the real death blow to many Traders who’d given themselves to the seductive siren call of the “can’t miss” indicator.

An excellent current example of this is the financial media’s near cult-like fascination with HEAT maps. Just put your money on green! You’ll be fine! If it’s up today, it’ll surely be up tomorrow too!

Now I’m not going to sit here and say that indicators are bad and completely useless. That would be false. However, when utilized without sound risk management skills, indicators quickly become a crutch that trick traders into thinking they’ve entered low-risk trades. And more likely – seduced by one-off successes with a particular indicator – novice traders will then look for the next even greater indicator to add to their charts. Much like an addict trolling for his next fix, it quickly escalates into a spiraling abyss of tangled intersecting and conflicting signals that ultimate leads to a Traders version of liver failure: Analysis Paralysis. And when you’re lost on this island, you and Wilson only have each other to trade with. (Talk about a “zero-sum” game).

Skip the middle-man working the corner of Hope St. & Greed Ave. and go right to the source: PRICE and VOLUME. The majority of popular indicators derive their calculations via these two inputs and I’d argue these are the only two variables that matter.

The Minimalist Trader keeps thing as simple as possible – a true student of the K.I.S.S. principle. He doesn’t let all the fancy bells and whistles of his trading tools rob him of his mission. He filters out distraction, and zeros in on two things: 1) Price and 2) His Trading Plan. Price tells him what to do next, according to his plan. Nothing else matters.

I am being purposely vague on this last point because there is no one right strategy for every Trader. Only the strategy that YOU’VE brainstormed about, rehearsed, and tested with YOUR money is the right strategy for you.

Focus on strategies that cue their entries and exits on simple, easily defined variables. “Complicated” is the enemy of “Effective.” The more work you’re required to put into each trade idea, the less likely you are to build any long-term rhythm with the strategy. And typically, at the first sign of trouble, you’ll ditch the idea and head back to the drawing board. This describes the first 10 years of my trading journey nearly perfectly. I would spend hours and hours brainstorming complicated trading algorithms that would work good for a couple weeks when put into practice. Then I’d end up with a larger than expected losing trade or losing day or total drawdown and flustered, I’d throw my work out the window and start over. If you were to scan the hard drives of all my past computers, you’d find hundreds of abandoned excel spreadsheets that housed once promising trading ideas.

Simple is the starting point for any Minimalist Trader’s ideas. There is beauty in simplicity. There is power in simplicity. Simplicity builds confidence.

I’ve had my best trading performance when I’ve utilized strategies that could be explained on the back of a business card. I’m pretty sure I couldn’t even explain the theory behind the use of some of the more basic and popular indicators on the back of a business card – much less a reliable trading strategy.

As we travel along the journey to apply the practice of minimalism to the art of trading and investing, you’ll notice ongoing themes of simplicity: Simplicity in strategy, simplicity in managing your finances to keep overhead low, simplicity in inputs, and simplicity in mindset. The more strategic, financial, and emotional baggage you lug around with you, the harder it is to be nimble enough to respond to trading opportunities that fit within your long-term strategy. We’re not in this for short term gain. We are here to build a sustainable lifestyle aided by our skills in slowly, stealthily extracting money from the thrill seekers and social climbers on Wall Street.

A minimalist mindset is your weapon against indicator abuse and the other enemies described in previous posts in this series. Stay tuned for more as I tackle another enemy of the Minimalist Trader: CABLE FINANCIAL NEWS next. Look for it after this holiday weekend.

If you’re new to this discussion, you can find the original introductory post in this series here. And the rest are in the recent archives.

Happy Thanksgiving!

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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