On BinaryOptionsStrategy.net, we have presented you with articles about trend analysis, candlestick formations and technical indicators. We have discussed different time frames, different types of assets, and different types of binary options. All the information in these articles is extremely valid and can be very important to your trading.
At first glance, it can therefore seem as if a trading strategy will deliver better results the more of these methods it includes into its decision making process. This, however, is a false conclusion. In real life trading, you should refrain from incorporating all of these methods into your strategy.
To understand why, let us look at an example: A successful poker player wins by forcing his opponent to make tough decisions. The tougher a decision gets, the higher the chance of making a mistake becomes. Now, imagine you are playing someone that will put pressure on you whenever he can and force you to make as many tough decisions as he can. Inevitably, you will make more mistakes than against another player that gives you a lot of free cards and allows you to make easy decisions.
The same rule applies to trading, too: Tough decisions create mistakes. If your trading strategy forces you to make a decision based on five different indicators, the market trend and candlestick formations, making a decision becomes a very tough decision. There are too many factors involved to generate a clear signal, and trading becomes guesswork.
Also, there is a time factor. Just like the clock running against you in online poker creates unbearable pressure while having to make difficult decisions, a trading opportunity will threaten to pass you by while you are trying to judge five indicators. This creates even more pressure and forces even more mistakes.
How you interpret the flood of information will largely depend on how you feel about an asset. Therefore, you will lose the biggest advantage a trading strategy creates for you: To take guesswork and emotions out of your trading.
A complex trading strategy might seem sophisticated, but it is not. A sophisticated trading strategy enables the trader to make easy decisions.
Therefore, the number one rule for creating a trading strategy is the KISS rule: Keep it simple, stupid.
Of course, every trader knows and understands the urge to keep perfecting a trading strategy. Still, perfection should come through modifying the already existent parameters of your trading strategy, not by adding new parameters. Trying to fine tune the setting for a technical indicator, for example, is a by far better decision than adding new technical indicators to the strategy, because it does not increase the complexity of the created signal.
For example, when you are working with two Moving Averages and create signals from the faster line crossing the slower line, it is common to change the number of periods both moving averages use until you find a setting you feel comfortable with. By doing this, you will keep your signal easy and straight forward. Adding three more indicators to your strategy, on the other hand, will complicate things and lead to bad decisions.
Any modification that does not increase the complexity of the signal is a modification you can make. Still, you shouldn’t go too overboard with it. Once you have found a strategy that works for you, stick with it. The success of your trading will depend more on how well you execute your strategy than on these small modifications.
The key to good execution is experience. Every time you change something, you will lose a part of your experience. You should therefore try to find an easy strategy you feel comfortable with as quickly as possible and then stick with it.