When to Keep it Simple

I often mention that I prefer to trade by paying attention to the big picture (risk management). When doing so, I also pay less attention to some of the finer details that could add to my trading profits. I do that for convenience and simplicity and suggest that rookie traders develop a similar mindset.

The first priority for newer traders has to be to survive. Keeping it simple, and avoiding some of the more confusing concepts, helps the trader meet that goal.  There is plenty of time for the trader to gain experience and then find ways to boost earning with appropriate risk.

With that in mind, I was interested to see the general concept of simplicity being addressed by Tadas at AbnormalReturns:

 “A simple, albeit less than optimal, investment strategy that is easily followed trumps one that will be abandoned at the first sign of under-performance.”

Doug Sundheim, in Taking Smart Risks, offers a different perspective:

“Playing it safe [staying in your comfort zone] is fraught with dangers: to wit, you don’t win, you don’t grow, you don’t create, you lose confidence, and you don’t feel alive.”

I often mention the advisability of trading within a comfort zone. I believe that it is important for the rookie trader to discover the borders of that zone and then trade within it. Once again, emphasis for rookies should on learning two things: how much risk is acceptable and how to adopt one or more option strategies. Remaining in a comfort zone avoids both panic decisions and larger losses.

After the former rookie has confidence and a winning track record, it becomes the proper time to gradually work on expanding the borders of that comfort zone.

Expand that zone (with patience) when ready, and you are on the path to grow and become a more efficient trader. Do it too soon and it’s likely that the overconfident trader will run into trouble. Jan 3, 2013

Mark Wolfinger