The Most Important Element of a Great Trading Strategy

I get asked a lot about what is needed to create a great trading strategy.  My default answer is to just grab my free E-book on the subject.  But, a better answer is that most traders make things much more complicated than they need to be.  We think that putting more indicators and trend lines in use somehow makes a strategy better.  I mean, with all those indicators and fancy patterns highlighted on the charts, it's more sophisticated, so it must be better, right? 

Wrong.  I have found that more complex trading strategies are made to be, the more they lose.  And you can understand why.  If you use 10 different indicators, they are going to conflict with each other and show false signals because they all work differently.

The key to a great trading strategy is simplicity and the consistency of that simplicity.  Instead of trying to add things to a chart, we should be looking to add as little as possible and only keeping the things that work consistently.  It's really the essence of the 80/20 rule.  20% of your efforts, generate 80% of your results.  20% of your indicators lead to 80% of your profits.

For example, years ago, I used to work off of 5-6 different indicators on my charts, but over time I noticed that there was a relationship between only 2 of them that consistently gave me the best entry signals in the charts - my proprietary Fractal Energy indicator in conjuction with the Bollinger Bands.  The energy indicator gave me great signals when charts were ready to trend or were exhausted ending a trend and the Bollinger Bands gave me a great signal on the direction things would go.  Using those two together and dropping the rest made things much simpler and I consistently won more trades.

If you are developing a trading strategy, you should definitely get a copy of my 5 Key Elements E-book, as it will help you, but most importantly, you should continue to ask yourself, "How can I make this more simple."  If you do that, you will find it much easier to build a strategy that wins more often and is easier to manage.