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A Guide to Creating A Successful Algorithmic Trading Strategy by Perry J. Kaufman

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CHAPTER 3 Don’t Make It Complex

We all know the phrase “Keep it simple, stupid.” It’s true. Making a system gratuitously complex is self-defeating. Complexity is not sophisticated; it’s just confusing. When there are too many moving parts, you can lose track of what is working and what is not. It’s difficult to understand something complex and it’s difficult to fix when it goes wrong, which is very likely to happen. In Chapter 2, we said that the idea needed to be easily understood. Try to keep it that way as you develop your idea into a trading system.

One phrase that was used by a well-known fund manager is, “Loose pants fit everyone.” I believe that. I want my trading method to work in as many different markets as possible, and the more rules there are, the less likely that will happen. The problem is that “loose pants” look awful. In trading, it means that you will take bigger risks, have longer periods of losses, and always feel that you could have avoided some ugly move by adding another rule. That’s not really true. Losses, some of them large, will occur anyway. We’ll discuss this in Chapter 13.

A trading method that works over a long period of time and in many markets is “robust.” I like robust. It means that there is something fundamentally correct about the strategy. For example, some years ago the “Intraday Breakout System” was the rage. The process was:

  • Record the high and low of the first hour of trading.
  • Buy a new high or sell a new low after the first hour. ...

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