On this site we have stressed that a simple trading system is more likely to make money than a complex one but there are many traders, who don't share our view but the facts clearly show that simple systems tend to be the most effective and here we will explain why.
The Nature of Forex Price Movement
the markets do what they want when they want as a huge number of traders make the price. Not only are they different in terms of the strategies there using, they have different amounts of capital, different skill levels and most, trade on emotion as much as logic. Another misconception is that all people trading currencies are trying to make money but this is not so.
There are huge transactions each day, in terms of money being exchanged for goods which have to be bought, profits for companies which have to be bought home and many other essential transactions like - people buying houses, exchanging currencies when they go on holiday which have nothing to do with speculation and finally, we have traders who are using currencies as a hedge and not to make money but simply to hedge of another market position.
So how on earth, can anyone think you predict what the price will be with such a diverse amount of inputs each day?
The answer is you can't, all you can do is study price action and respond to what you see so it really is just looking at probabilities as we have said many times before. There is no way to predict the future in any financial instrument and this includes currencies. You can make profits with your trading signals as we have discussed elsewhere but why are simple currency trading systems best.
Complex Trading Systems See Price Patterns that Never Repeat
From our description of how currency prices move, it should be obvious that very short term price swings cannot be traded but the longer term moves become more accurate. By long term I am referring to days, weeks and months. Standard deviation of price from the mean in short time frames are not relevant at all and just represent the random moves of people trading the currency.
The longer the time frame on a chart, the more accurate the support and resistance levels become in terms of generating trading signals in terms of prices breaking a chart level or holding the level.
The good news is these key levels are easy to see on a chart and can be traded, with a simple set of rules or strategy. You can see the key levels and to trade them, doesn't require much more than to look at the level use simply price action to generate a trade or if you wish, you might want to check momentum and volatility with a couple of indicators but that will be enough.
So why is a complicated system not as good as a simple one in doing the above?
There is only so much to see! Its support and resistance and in a longer term time frame. You can trade it with a simple system, you don't need any complex equations, to see something which even a child can spot.
The problem is the people who believe in advanced trading techniques won't accept this – so why?
The misunderstand how currency pairs move and think what has happened in the past will happen again exactly and it doesn't as we have seen from the vast amount of different people and companies who trade Forex and the different skills and motives they have for doing so.
They overlay as many indicators as they can, to make the signal work but all they do is end up with a system that either can't generate a signal correctly, has stop loss to close or fails to generate the signal at all, because all the indicators don't line up and they miss it.
KISS Keep It Simple Stupid
One of the best comparisons of simple methods over complex was the way Bruce Lee simplified Kung Fu fighting techniques in the 1970s. He concluded that there were to many inputs which were mechanical and on a TV show I watched, he described how if someone grabs you aggressively, you are taught by many self defence experts to do step A B C D etc but as Bruce said forget that “Step in his instep” one simple reactive move to get him to realize you. You can see from this that a simple move is best – if you do to many steps or try and be to mechanical, you will be in trouble!
He went on to simply his style and only used moves that were effective on an opponent – did it work? Well he was the greatest Kung Fu fighter of all time and his style is still the norm today.
There are some areas where complication can work and it's in areas of life where there is a scientific set order. A good example is inside a computer which is set to do specific set tasks but the task, must always be the same one and conform to science or mathematical.
Forex markets are an area where most people think complex techniques work but they don't and its human's that make them redundant. Think back to the Bruce Lee example of a man grabbing you – if you are attacked by one man, he might grab you, he might punch you or kick you – it wont be the same type of attack all the time but if you are trained in martial arts you make a simple move to counteract the assault. The key point here is – the opponent ( attacker) is unpredictable and its the same in Forex markets. On the other side are a group of humans who you have to watch but to make money when they don't only requires – you look at the price and use a simple move to catch a price move and set a
Because so many people lose with their Forex trading strategies, the logical conclusion is to assume it must take extra effort to make money but the reverse is true the best trading systems are simple but you do need the right psychology to apply it.
You have to be cool under pressure. Think back to the Kung Fu example, if you are attacked you must stay calm and execute your move which can be tough, when you are in physical danger but anyone can learn simple techniques to defend themselves. Its the same in Forex you need to stay calm, focused and keep any emotions under control. Sure the market won't hurt you physically but it can hurt you financially.
If you have read this far you will now see why simple and best systems makes sense in terms of choosing a trading strategy and it should do, because the facts prove it.