{"id":15552,"date":"2011-11-14T11:05:16","date_gmt":"2011-11-14T16:05:16","guid":{"rendered":"http:\/\/www.smbtraining.com\/blog\/?p=15552"},"modified":"2021-05-07T11:15:08","modified_gmt":"2021-05-07T15:15:08","slug":"less-is-more-usually","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/less-is-more-usually","title":{"rendered":"Less Is More–Usually"},"content":{"rendered":"

Less is more\u2014most of the time.\u00a0 In my early days, I started out with almost twenty different indicators in a single system\u2014and why not; the computer was going to do all the work. \u00a0I figured that if I combined enough techniques, I could find the perfect entry signals\u2014I hadn\u2019t even thought about the importance of exits back then.\u00a0\u00a0 Well, needless to say I immediately ran into two problems:<\/p>\n

1)\u00a0\u00a0\u00a0\u00a0\u00a0 \u00a0The first was that in looking for the perfect entry, I found almost none.\u00a0 I had set so many hurdles to get over so that rather than finding the perfect entry, I stumbled and fell most of the time.<\/p>\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0 But more importantly, I was using a multitude of techniques that told me the same thing.\u00a0 My first systems tended to be trend following, and I might have as many as a dozen trend following techniques all in the same system, and guess what\u2014they all told me the same thing with a few nuances so there was no way for me to determine what was really contributing to my returns and what was just noise.<\/p>\n

The best way to build a trading system using multiple techniques is to select a few techniques from different categories of indicators.\u00a0 For example, let\u2019s look at our best trading system:<\/p>\n

1)\u00a0\u00a0\u00a0\u00a0\u00a0 It started out over ten years ago with just a proprietary momentum technique as the setup with a couple of candlestick patterns as confirming triggers to take the trade.\u00a0 It worked great in selling option premium.<\/p>\n

2)\u00a0\u00a0\u00a0\u00a0\u00a0 A few years later as we moved into trading equities long\/short, we added a trend following technique which reduced the number of trades, while adding to the P&L.\u00a0 We added an additional price confirmation trigger about the same time.<\/p>\n

3)\u00a0\u00a0\u00a0\u00a0\u00a0 After a couple more years, we added a cyclical component which again reduced the number of trades while improving the P&L\u2014a lot in this case.<\/p>\n

4)\u00a0\u00a0\u00a0\u00a0\u00a0 And a few months ago we added an additional trend following technique that dramatically reduced the number of trades with a large improvement in performance.<\/p>\n

5)\u00a0\u00a0\u00a0\u00a0\u00a0 We then took a really good trading system for equities and adapted it to the FX market where we found that adding aggressive stops and price targets made a huge improvement, whereas they were of limited importance in the equity market.<\/p>\n

6)\u00a0\u00a0\u00a0\u00a0\u00a0 And we are constantly testing other possibilities, always looking for a new positive surprise.<\/p>\n

The point isn\u2019t to emulate what worked for us, but rather to understand that it will usually be a small number of techniques from different categories that deliver the majority of the return, and that combining too many techniques will likely limit your signals and if there are too many from the same category, they will not really add to the robustness of your system–you won\u2019t really know where your returns are coming from so it is hard to make improvements.<\/p>\n

Take a look at the following table\u2014this is just a small sample of the indicators that are available, and of course you can write your own as we did because we wanted a momentum indicator that didn\u2019t jump all over the place and there was nothing available that fit our needs.<\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
<\/td>\nTrend<\/td>\nVolatility<\/td>\nMomentum<\/td>\nCycle<\/td>\nMarket Strength<\/td>\nSupport Resistance<\/td>\n<\/tr>\n
Moving Average<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Linear Regression<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
MACD<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Trend lines<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n<\/tr>\n

Average True Range<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Bollinger Bands<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
\n

Linear Regression Slope<\/p>\n<\/td>\n

<\/td>\n<\/td>\nX<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Momentum<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Rate of Change<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Stochastics<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
RSI<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/td>\n<\/tr>\n
Detrended Price Oscillator<\/td>\n<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/tr>\n
Fibonacci Time Zones<\/td>\n<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/tr>\n
Fourier Transform<\/td>\n<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/td>\n<\/tr>\n
Accumulation\/Distribution<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
Money Flow<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
Moving Average (Volume Adjusted)<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
On Balance Volume<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
Volume Oscillator<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n

<\/td>\n<\/tr>\n
Fibonacci Retracements<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n<\/tr>\n

Gann Lines<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n<\/td>\n\n

X<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

If you have been having trouble getting started or have been working on a system that just doesn\u2019t perform, maybe it is time to select no more than three techniques from this table\u2014each in a different category\u2014to get started.\u00a0 Sometimes a clean sheet of paper is the only way to clear your head and get going down a new path.\u00a0 Give it a try.<\/p>\n

Author:\u00a0 Rick Martin<\/p>\n

For more information or answers to your questions, email Rick at rmartin@smbcap.com<\/em><\/p>\n

Hypothetical computer simulated performance results are believed to be accurately presented. However, they are not guaranteed as to accuracy or completeness and are subject to change without any notice. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Since, also, the trades have not actually been executed; the results may have been under or over compensated for the impact, if any, of certain market factors such as liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any portfolio will, or is likely to achieve profits or losses similar to those shown. All investments and trades carry risks.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Less is more\u2014most of the time.\u00a0 In my early days, I started out with almost twenty different indicators in a single system\u2014and why not; the computer was going to do all the work. \u00a0I figured that if I combined enough techniques, I could find the perfect entry signals\u2014I hadn\u2019t even thought about the importance of exits back then.\u00a0\u00a0 Well, needless … Read More<\/a><\/p>\n","protected":false},"author":921,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,1936],"tags":[19,20,68,215,1947,1945,1943,1710],"class_list":["post-15552","post","type-post","status-publish","format-standard","hentry","category-general-comments-2","category-ricks-blogs","tag-algo-trading","tag-algorithms","tag-blackbox","tag-developing-trading-systems","tag-gray-box","tag-rules-based-trading","tag-system-trading","tag-trading-system","no-post-thumbnail"],"yoast_head":"\nLess Is More--Usually | SMB Training<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.smbtraining.com\/blog\/less-is-more-usually\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Less Is More--Usually | SMB Training\" \/>\n<meta property=\"og:description\" content=\"Less is more\u2014most of the time.\u00a0 In my early days, I started out with almost twenty different indicators in a single system\u2014and why not; the computer was going to do all the work. \u00a0I figured that if I combined enough techniques, I could find the perfect entry signals\u2014I hadn\u2019t even thought about the importance of exits back then.\u00a0\u00a0 Well, needless ... 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