How to Trade Smarter by Thinking Simpler

Is simplicity the key to financial success?

Could an easy to understand process really be the answer?

Many will scoff at this thought. They’ll say simplicity is for novices. In their view, elaborate strategies and exotic products are the only way to make big money.

Sure, financial markets are becoming ever more complex. The days when you’d phone your broker to buy a few blue-chip shares are a fading memory.

But a straightforward approach is still worth considering.

Have a read of this:

Never underrate the majesty of simplicity as a long-term strategy for productive investing. Simplicity, indeed, is the master key to financial success.

John Bogle, Founder of Vanguard

John Bogle is a pioneer. He made wealth strategies affordable to just about everyone. This was at a time when Wall Street was charging big dollars for ordinary returns.

Vanguard’s strength is its simplicity. The firm doesn’t rely on analysts like traditional funds. Its aim is to ‘simply’ replicate an index. Investors benefit from lower fees and market performance.

And do you know what?

It works…

Vanguard manages over $4 trillion and is the world’s second largest fund manager. ‘Keeping it simple’ has made the company one of the biggest success stories in history.

The US Navy has a name for this approach — the KISS principle, or keep it simple, stupid.

The theory says that simple systems are better than complex ones. That’s because fewer moving parts makes them less prone to failure.

This same logic applies to trading…

Simple strategies often beat their fancy cousins. I’ve seen some of the most complex ‘black box’ systems fail spectacularly, while simpler strategies have thrived.

So why choose complicity at all?

Trading simpler is key

Well, many people believe it’s clever to be complex.

Simplicity on the other hand is often seen as inferior, or even worse, unintelligent.

But that’s a mistake.

You see, simplicity requires the clearest of thinking. It involves identifying the core elements of a problem and working out an efficient solution. And that can be hard to do.

Quant Trader combines both complexity and simplicity.

The system’s framework is unavoidably complex. It involves a lot of computer code to deal with millions of pieces of data — there’s no getting around this.

But the strategy itself is easy to grasp.

In fact, my 12-year-old understands the concept. And that’s the way it should be.

Let me describe Quant Trader in two sentences:

The strategy is to buy stocks that are rising and avoid (or short) stocks that are falling. It’s then a matter of cutting losses early and letting profits run for as long as possible.

That’s essentially how it works. I call this ‘elegant simplicity’.

So how is the strategy stacking up?

Well, let’s have a look.

Check this out:

Money Morning 03-08-2018

Source: BigCharts
[Click to open new window]

This is the All Ordinaries since 14 November 2014 (when Quant Trader began live signals).

While there’s been lots of movement, the market hasn’t made much headway. The index is currently trading near the same level as it was in March 2015.

A missing element over the period has been a smooth uptrend. Instead, sharp corrections have followed the advances. This makes it harder for traders to stay on a trend.

What’s more, only a little over half the months are showing a gain. The historical average is for about two-thirds of months to be in positive territory.

Now have a look at this:

Money Morning 03-08-2018

[Click to open new window]

This is the hypothetical performance of Quant Trader’s live signals. It assumes placing $1,000 on every long signal, and there’s no allowance for costs or dividends.

While the All Ordinaries is still near its 2015 peak, the system has made a series of new highs.

Have a close look at the two charts…

You’ll notice they tend to rise and fall on the same day. The difference is the size of the moves. Quant Trader often does better when the market rises, and not as bad when it falls.

Over a few years, small daily differences can really add up.

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Simplicity in motion

So why is Quant Trader outperforming?

Well, it’s simple…

Quant Trader’s portfolio has a strong stock bias. The system buys as prices rise, exiting when a stock falters. This is how the system gets an edge on the All Ordinaries.

Let me show you what I mean:

Money Morning 03-08-2018

[Click to open new window]

I call this ‘simplicity in motion’.

The graph matches Quant Trader’s performance (the blue line) against the All Ordinaries. The strategy of running profits and cutting losses is out in front.

Remember John Bogle’s words:

Never underrate the majesty of simplicity as a long-term strategy for productive investing. Simplicity, indeed, is the master key to financial success.

That’s what Quant Trader is all about.

The system uses a strategy that almost anyone can grasp. It then applies this process to over 2,000 ASX listings. The result is a market beating performance.

Despite what many people believe, you don’t need a complex plan to make money. Some of the best strategies require little more than a few basic indicators.

So don’t overcomplicate things — it isn’t necessary.

Instead, try to simplify your thinking. Your portfolio could be all the better for it.

Until next week,

Jason McIntosh,
Editor, Quant Trader

PS:If you manage your own money or simply want to learn the most effective strategies to both grow and protect your wealth, this free report is for you. Click here for details.


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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