Albert Einstein and the secret of ultra-simple trading strategies
“Everything should be made as simple as possible, but not simpler.”
— Albert Einstein
A trading strategy should be as simple as possible, but not simpler. The “magic” methods presented in 5 minutes on social media are too simple to be profitable: they rest on a perfect example cherry-picked after the fact, and include no money management plan. Without a defined gain/risk ratio, no strategy holds up over time.
Needless to say, Einstein does not feature on my list of elite traders — even though I have no doubt he could have been excellent.
As many great scientists understood after him: for something to be well explained, and therefore understood, you have to be able to make the complex as simple as possible. People often say you should be able to explain it to a 7-year-old.
But you must not make things too simple either — otherwise what you explain becomes useless, unusable, too rough to serve any purpose.
The “wow” effect in the markets
In the markets, and especially in forex, you’ll hear plenty of people tell you:
“It’s simple, look at this candle, this line, this little pattern — you buy here, you sell there, BINGO, you’re rich.”
— The marketer trader
Guaranteed wow effect. Thousands of likes. And a course to sell right behind it.
Albert was right. It is simple enough to make you grasp a principle — especially with the perfect example, carefully selected to trigger that wow effect. But it is too simple to make you rich.
Why?
If getting rich really were that simple — switch on the PC, look at a chart for 5 minutes and follow a line — don’t you think plenty of intelligent people would have avoided getting caught out?
Don’t forget that when you buy, there is a seller on the other side. That seller is not stupid. They have a good reason to sell. It simply isn’t the same reason as yours.
What makes a good trading strategy?
I am not saying an effective strategy has to be ultra-complex. It doesn’t. But it must not be too simple either. And above all, it has to be paired with a money management plan guaranteeing that when you are right you gain more than when you are wrong — which is inevitable.
Three rules to avoid the trap:
- Be suspicious of the wow effect. The more magical a strategy looks at first glance, the more scepticism it deserves.
- Test on many cases before concluding. One perfect example proves nothing. A run of 100 consecutive trades does.
- Demand a clearly defined gain/risk ratio. A good strategy tells you not only when to buy, but how much to lose at most — and how much to aim for.
One last thing: those “extraordinary” trading robots springing up all over the internet, with retouched screenshots and videos of spectacular gains — if they could genuinely make you a millionaire in a day, why would their creators waste their time posting videos on YouTube?