The Importance of Keeping it Simple
Mental Game of Trading
Featuring Dave Keller
Published on: June 18th, 2019 • Duration: 5 minutesDave Keller, CMT, president of Sierra Alpha Research, explains the importance of keeping it simple. He gives an example of how splitting his indicators into two well-defined groups has helped him improve his own process.
DAVE I'm the president and chief strategist at Sierra Alpha Research based in Cleveland, Ohio. So, I help financial advisors and institutional investors to make better decisions and do that in a couple different ways. Help them maximize returns, manage risk, and bring more mindfulness and awareness to their investment process. I also enjoy incorporating non financial topics into financial topics. So, I'm a student pilot, I'm a musician. And so, a lot of the best ideas I think you can bring as an investor are learning from other disciplines, learning from other activities. And I write a blog at marketmisbehavior.com.
So, often, in my discussions with clients, we're talking about keeping it simple. And I found as an industry, and as investors, we love to make things more complex. And as an industry as a whole, we love complexity, right? We love to make things more complicated. Because it seems more rigorous, it seems more detailed, it seems more effective, when in reality, the more simple things are, the more consistent and the more robust they tend to be in terms of the results of them.
In my former life, I used to work with a lot of the trading floors here in New York. So, I was at a trading floor downtown, and I was working with the currency traders on the FX desk. And so, I spent time walking around and my job at the time was, as a technical analyst, to walk around and make sure that- just to see how people were using charts, see how people were visually analyzing their space, and then to help provide some guidance on how they can improve it. And I noticed one trader in particular had the cockpit of a ton of screens. And as I looked, there had to be 50 or 60 different technical indicators. He literally had every technical indicator I had used was on the screen at once, all across the screen.
So, I'm watching him for a couple minutes. And I'm thinking, like, this is unbelievable, I can't believe how he's able to use all this. So, I shook his hand, introduced myself and I said I'm a technical analyst, you're using an amazing amount of information. Can you tell me like what's your secret? How do you use it? He said, I have no idea what any of this stuff means. I'm like, okay, I said, but the head of the desk walk by and go, wow, look at that guy. He's all over the markets, right?
So, if you want to impress people, if you want to make things look more complicated, you can do that. But I've never put a chart or an insight in front of a client that has more than a couple inputs at any time. It's really important to keep it simple. And the more information you put on a chart, the more detail you try to include, the more it ends up clouding the issue. It doesn't clarify the issue, it ends up clouding it.
So, a lot of times I'm coaching my clients, we work on simplifying, we work on simple inputs, consistent inputs that will allow them to draw consistent conclusions. Otherwise, you open yourself up to all those behavioral biases, confirmation bias and others that end up just getting in the way of good returns.
How do I keep it simple, I like to you use a combination of trend following and mean reversion. And what I mean is, I like having part of my toolkit that's helping me understand where the trends are. Defining trends, recognizing trends, and understanding when trends might be exhausted, when they might be a little long in the tooth. The other side of that is play the mean reversion which is understanding when things get overextended. So, when has the market gone too far too quickly, and might be poised for a rebound.
And in general, looking at equity markets primarily over longer term timeframes, you're better off being a trend follower. So, it's better over six to 12 months to bet on what's has been working and to underweight what has not been working. In general, that's what the data proves out. But in the short term, if you're looking at a couple days to a couple of weeks, you really should be betting on mean reversion. Meaning, you should identify those little peaks and valleys within those longer trends.
So, the sweet spot I would think in terms of keeping it simple is having an indicator, an approach that's going to help you measure the long term trend, and then having a separate part of your toolkit simplistically telling you when you might want to revisit something because it might be overextended. And if you use the two of those in combination, overall, you're going to do pretty well. You won't hit everything. There's nothing perfect but you will be on top of most things and you won't be caught off guard which is what's most important.