Why Traders Should Keep It Simple
Definition of KISS
KISS is an acronym for the design principle "Keep it simple, Stupid,” meaning "Don't be stupid, keep it simple!". Other variations include "keep it short and simple" or "keep it simple and straightforward”. The KISS principle states that simplicity should be a key goal in design, and that unnecessary complexity should be avoided.
A KISS trader realizes that the most profitable trades, a great deal of the time, are those that are the simplest to spot. This type of stock trader, views this scenario as one of the simplest in nature, but realizes that it is the smartest type of trade because it produces the greatest profits.
I particularly like this type of trading at certain times, and the stock trader that adheres to this principles of a KISS trader, must be aware that it does not mean throwing out all the technical analysis and indicators but to simply (as it says) “KEEP IT SIMPLE”.
Some propose that it should follow its own advice by dropping the redundant letter and be just KIS, "keep it simple". Others believe that this final point is, in fact, essential.
Development of the Keep It Simple Stupid Concept
The acronym was first coined by Kelly Johnson, lead engineer at the Lockheed Skunk Works (creators of the Lockheed U-2 and SR-71 Blackbird spy planes, among many others).
While popular usage translates is as 'Keep it simple, stupid', Johnson translated it as 'Keep it simple stupid', and this reading is still used by many authors. There was no implicit meaning that an engineer was stupid; just the opposite.
The principle is best exemplified by the story of Johnson handing a team of design engineers a handful of tools, with the challenge that the jet aircraft they were designing must be repairable by an average mechanic in the field under combat conditions with only these tools. Hence, the 'stupid' refers to the relationship between the way things break and the sophistication available to fix them.
The acronym is used by many in the United States Air Force.
Occam's Razor is a principle attributed to the 14th-century English logician and Franciscan friar, William of Ockham. It forms the basis of methodological reductionism, also called the principle of parsimony or law of economy.
In its simplest form, Occam's Razor states that one should make no more assumptions than needed. Put into everyday language, it says “The simplest explanation is the best.”
When multiple explanations are available for a phenomenon, the simplest version is preferred.
The principle is most often expressed as Entia non sunt multiplicanda praeter necessitatem, or "Entities should not be multiplied beyond necessity".
Not to be left out, Albert Einstein's maxim was"everything should be made as simple as possible, but not simpler".
Leonardo Da Vinci said "Simplicity is the ultimate sophistication".
Antoine de Saint Exupéry said "It seems that perfection is reached not when there is nothing left to add, but when there is nothing left to take away".
Henry David Thoreau said "Our life is frittered away by detail."
Applying the Simplicity Principle to Trading
This principle can be applied to nearly every facet of life and trading, and is positively correlated with experience. The more you know about any subject, the quicker you will be able to find elegant and simple solutions.
A KISS trader, therefore, applies the KISS principle to the world of trading and investing. It seems the more complicated a trading system is, the less likely it is to produce positive results over the long term. Complicated trading strategies and technical analysis, although sometimes psychologically appealing, can be very counterproductive to your bottom line. Multiple rules often just serve to convolute systems that are very simple at the core. As in most things in life, simple is truly better when it comes to trading strategies.
A successful KISS trader has trading strategies which, at their root, are relatively straightforward and simple to implement. Also, the more complicated the strategy the greater the danger that it will end up failing.
Bear-in-mind that a strategy is not just about entry points - a good trading strategy includes multiple things such as what and when to buy, where to place stop loss orders and when to take profits, risk management, position sizing, expectancy…etc. A KISS trader usually has good discipline in regard to selection and application.
The Brain and The KISS Trader
Your brain is complex with multiple reverberating circuits and connections that drive you to think yourself into or out of any situation. Your brain lies to you night and day in the most convincing and deceptive ways imaginable. If you are finding yourself challenged, confused or messed up in your trading it is for one reason: Your best thinking got you there!
Those who are the most confused in the markets right now are those who are reading newsletter after newsletter, site after site, pundit after pundit trying to find a reason for "WHY" things are happening.
Everyone has something to say, to write, to postulate or theorize about such situations as:-
• "Why are the markets rallying when the economy is so bad?
• Who is buying into this rally?
• When is it going to end?
• Why are the shorts I put on at $SPX 950 still tanking?
• Where is the correction?
• What is going to happen?"
Since you don't know the answer, you look everywhere until you find an answer that you like. Usually this is an answer that agrees with your beliefs-a simple expression of what is called "confirmation bias." How can you know what you don't know when you don't know what you don't know?
Why do you continue to look outside of yourself to other people for answers that they don't have but are delighted to sell them to you-often for outrageous prices and promises.
Different Opinions Which Help A KISS Trader
Markets are made because people have different opinions. This is how it should be. If everyone thought the same way, believed the same things-there would be no markets. For example-in the futures markets (basically a zero sum game-but not quite)-for every buyer there is a seller. This means that you are trading your beliefs against the beliefs of those who disagree with you. You know that, as a KISS trader, your beliefs are correct if your position is making money.
What is correct? Who is correct? The answer is simple. The markets are correct. IF you are underwater in your positions and in the hold and hope mode, you are not listening to the markets.
The Answer Is Simple for a KISS Trader
Why are you tormenting yourself trying to "figure it out" when the answer is simple? Remember that the greatest secrets are always in plain view. It is happening because it is happening. All of the mental and intellectual tricks (neurotic defenses, thinking biases) that you play on yourself are for the purpose of easing anxiety over a situation that you do not understand. Often, the more you search for answers, the more anxious you become. You are the problem and you are the solution. It is just that simple. Stop trying to figure it out. Accept that it is happening and act according. Learn to respond, rather than react. If price is going up, it is going up and that is that. Go with it and continue with it until it stops going up. If price is going down, go with it until it stops going down, according to the direction of your trading strategy – such as put options.
The 14th Century Franciscan monk William of Occam formulated this concept that provides the basis for many present day scientific theory and models. The concept, know as Occam's razor, states that, given any competing sets of solutions for a problem, the explanation must be made in terms of what is already known. It was Kelly Johnson, engineer from Lockheed, who coined the phrase “Keep It Simple, Stupid!” which is the common understanding today. That does not necessarily imply that it will be the most simple explanation (although it often is!), but it will help you focus and alleviate anxieties and endless frustrations trying to figure out what you don't know. Focus on what you do know, and use this knowledge to carry to further into study so that you become an expert in whatever you are trading. The more you know, as a KISS trader, about one particular stock, future, commodity or currency-- the more quickly you will come to creative mastery. The more you will be able to simplify.
A Theoretical View on Trading from William of Occam
If Occam was alive today, and was a KISS trader, this is probably his take on the market and the way he would trade:-
• There is far too much noise – I will turn down the noise in my brain and my charts.
• I trust what I see in front of me – markets do not lie: people do.
• I am not fooled by highly intellectual explanations for why things are happening- I will listen to the voice of the markets.
• I will be wise in trading as it will manifest through simplicity – the more complex I make it, the greater the probability that I will lose.
• The market speaks in probabilities- therefore I will not try to change the language by making it one of certainty.
• If what I am doing is working, I will keep doing more of it – if it is not working, I will get out and go back to basics.
• I will find an edge and keep sharpening it – the disciplined trader wins – the emotional trader loses. In the battle between discipline and emotion, it will be the disciplined that will massacre and plunder money from the emotional.
As a professional trader you are constantly learning and testing new trading techniques. A good lesson to be learned is that the more sophisticated the techniques, the worse the results may be. By using complex fundamental analysis, quantitative algorithms, and many varying technical indicators at once in your trading methods usually ends with the same result… losing money!
This is where a KISS trader usually has the advantage, and the most profitable trades, as he/she has the ability to spot the simplest trades. The KISS trader enters into these types of trades with confidence and size. Though they might be the simplest in nature, they are the smartest type of trades to make because they produce the greatest profits.
The K.I.S.S. principle states that simplicity should be a key goal in design, and that unnecessary complexity should be avoided.