Over the weekend I got an email from a trader who follows the Taylor Trading Technique as he learned from Linda Raschke. Linda’s version of the Taylor Trading Technique is the basis of my Swing Trader’s Insight futures advisory service.
The trader asked me whether I use indicators for trading with the TTT and whether I recommended their use (Linda has shown using a moving average oscillator, ADX and ROC among others). As I was writing a response to him I saw a blog post about applying Occam’s razor to trading. I am a big proponent of the “simpler is better” school of trading so I thought I’d explain my take on simplifying your trading strategy.
The theory of “Occam’s Razor” is attributed the English monk and logician William of Ockham. He lived in the late 13th through mid-14th Century. Although there’s no specific writing of Occam’s razor attributed to him it is commonly accepted that he developed it.
Occam’s razor is said to be the maxim that assumptions introduced to explain a thing must not be multiplied beyond necessity. Another way of putting it is to choose the hypothesis that makes the smallest number of assumptions when hypotheses are equal in other respects.
How does this apply to trading? In myriad ways it argues to simplify your trading. This means fewer inputs to your trading decisions. It could be a smaller number of indicators, less tweaking (curve fitting) of the ones you use, or paying less attention to fundamental factors.
How can you use the Occam’s razor principle? For some it may be the trading process itself – cleaning your trading space, reducing your inputs while trading (news wires, TV, trade rooms) or trading fewer setups.
For me that’s where the Taylor Trading Technique comes in. The TTT has a limited use for indicators and I find they can almost always be secondary to the price chart itself. You may use an indicator to determine where a market appears to be in the TTT cycle but you can stay with price action itself to make trading decisions. Doing this can allow you to trade off price itself, not more complicated derivations of price. Understanding the physics of riding a bicycle doesn’t help you get out and ride a bike.
Letting go of complex solutions can be tough for a trader. Trading is a difficult endeavor, and I think it’s human nature to assume that a difficult problem has to have a complex answer. There’s also a belief that a trading system can be tweaked or fine-tuned to “solve” the puzzle of trading. In reality, complicated systems tend to obscure the essence of trading, that trading isn’t “You against the markets, it’s you against you” (to borrow a saying from Ed Seykota). Occam’s razor may allow you to employ a more robust system that will stand the test of time and give you better market and self mastery.
© 2011 Scott Hoffman