It can be tempting to believe that a more complex exchange traded fund (ETF) trading strategy will naturally yield better results. While tricky, convoluted strategies have their appeal, traders often find themselves going back to basics, and for excellent reason.
The market does not always reward logic and when it does it, it may not do it in the trader’s time frame. As Cory Mitchell for Investopedia points out, the market can be wrong a lot longer than the trader can afford to be right.
Complex strategies, Mitchell says, generally start from a simple strategy that works well for the trader. But soon enough, that strategy is tweaked and re-tweaked in an attempt to make it even more profitable before, in total frustration, the trader may go back to simpler times.
Here are some reasons why it is better to keep your strategy simple:
- In the end, the price is all that truly matters. Price movements are where profits are created. A complex strategy isn’t necessarily going to augment this.
- The risk of loss is always present, even with the most complex of strategies. A complex strategy also does not equal success or earnings. A simple strategy may help you better control your losses.
- It’s common for traders to become overloaded as a strategy gets more and more complex. When it becomes too overwhelming, they’ll often find themselves stripping away the fancy strategies and going back to where they should have stayed in the first place.
- A simple strategy will be something you can stick to. Studies have shown that the more complex a strategy is, the less likely most traders are going to stick with it for the long haul.
Our strategy is the 200-day moving average; when a position is above the line, it’s a buy signal. When a position dips below, it’s a sell signal. By having a firm stop-loss point, you put a cap on your losses instead of riding a position to the floor in hopes that it will “come back.” [Other lessons in ETF investing.]
With enough practice, your strategy will be your emotional trump card. When the uptrend is there, a simple, sound strategy will have you in the markets. When the trend peters out, your strategy will tell you it’s time to sell.
And remember: whether your strategy is simple or complex, it will do you no good if you don’t use it. [What is your ETF strategy?]
For more stories about trend following, visit our trend following category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.