When exchange traded fund (ETF) investing, the temptation is to believe that the more complex a strategy, the better your chance for success. That kind of thinking can be hurting you in the long run.

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.” The strategy is also so simple, anyone can use it.

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.