How Occam's Razor Can Supercharge Your Algo Trading
Would you believe that a 14th century priest, and his concepts, can help make you a better algo trader? Well, English logician and Franciscan friar William of Ockham really can make you a better trader.
Ockham developed the concept commonly referred to as Occam's Razor. Simply put, this principle favors the simple over the complex, when there is a choice to be made, or a path to be followed.
How can this apply to trading? A few different ways.
First, if you are an algo system trader, perhaps your approach has too many rules, too many parameters, or too much optimizing. While every parameter you add might make your system better historically, the more parameters you have, the less prone the system is to work going forward. Simpler concepts and simple rules tend to be based on fundamental market principles - ones that aren't as likely to change.
Second, if you are a discretionary trader, you might trade off of news reports from CNBC, Bloomberg and multiple other sources. Multiple news sources might give you more data, but does it really give you more knowledge? You might find that with multiple, conflicting pieces of information, you actually can't trade at all - rather, you are a victim of "analysis paralysis."
Third, maybe your trading office looks like the control room for the Space Shuttle. If you try to trade off all of the information shown on all the screens, you might just find yourself overwhelmed. It is better to stick to a few monitors of information, and know that information very well. The best traders don't need a dozen monitors to trade well - usually 1 or 2 monitors is plenty.
Many new traders tend to think that that more complicated they make trading, the easier it will be to "solve" the markets. Instead, they should be listening to William of Ockham, and making things simpler. Simple, done correctly, can lead to more profits, and stand the test of time better than complicated approaches.
Ockham developed the concept commonly referred to as Occam's Razor. Simply put, this principle favors the simple over the complex, when there is a choice to be made, or a path to be followed.
How can this apply to trading? A few different ways.
First, if you are an algo system trader, perhaps your approach has too many rules, too many parameters, or too much optimizing. While every parameter you add might make your system better historically, the more parameters you have, the less prone the system is to work going forward. Simpler concepts and simple rules tend to be based on fundamental market principles - ones that aren't as likely to change.
Second, if you are a discretionary trader, you might trade off of news reports from CNBC, Bloomberg and multiple other sources. Multiple news sources might give you more data, but does it really give you more knowledge? You might find that with multiple, conflicting pieces of information, you actually can't trade at all - rather, you are a victim of "analysis paralysis."
Third, maybe your trading office looks like the control room for the Space Shuttle. If you try to trade off all of the information shown on all the screens, you might just find yourself overwhelmed. It is better to stick to a few monitors of information, and know that information very well. The best traders don't need a dozen monitors to trade well - usually 1 or 2 monitors is plenty.
Many new traders tend to think that that more complicated they make trading, the easier it will be to "solve" the markets. Instead, they should be listening to William of Ockham, and making things simpler. Simple, done correctly, can lead to more profits, and stand the test of time better than complicated approaches.
About The Author: Kevin Davey is an award winning private futures, forex and commodities trader. He has been trading for over 25 years.Three consecutive years, Kevin achieved over 100% annual returns in a real time, real money, year long trading contest, finishing in first or second place each of those years.
Kevin is the author of the highly acclaimed book "Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading" (Wiley 2014). Kevin provides a wealth of trading information at his website: http://www.kjtradingsystems.com
Copyright, Kevin Davey and KJ Trading Systems. All Rights Reserved. Reprint of above article is permitted, as long as the About The Author information is included.
Kevin is the author of the highly acclaimed book "Building Algorithmic Trading Systems: A Trader's Journey From Data Mining to Monte Carlo Simulation to Live Trading" (Wiley 2014). Kevin provides a wealth of trading information at his website: http://www.kjtradingsystems.com
Copyright, Kevin Davey and KJ Trading Systems. All Rights Reserved. Reprint of above article is permitted, as long as the About The Author information is included.