Yes, I confess. I wrote that title to mess with search engines. As it turns out, the most popular page on this site, by far, is this one. It’s particularly curious for me, since I keep making the point that trading system rules are overrated. I’ve never come across anyone selling trading rules who actually knows anything about trading. And yet people pay thousands of dollars for such rules.
I’ve been approach sometimes by skeptics who don’t believe that trend following trading systems rules can be as simple as I claim in my book and on this site. They are right. The rules can in fact be even simpler.
Let’s try this: Construct a trend following trading system with the simplest possible rules. How many lines of code can you boil it down to? No, you still have too many rules.
The simplest system you’ve ever seen
Here are the rules for this system.
- If the current price is higher than the price one year ago, go long.
- If the current price is lower than one year ago, go short.
I ran this system on a broad set of diversified futures markets, covering all asset classes. But a system so simple cannot possibly work, right? It doesn’t even have any technical indicators. Well, judge for yourself.
To make it a little easier to read, I’ll show the yearly results below as well. The green bars show the returns and the red bars the maximum intra-year drawdown.
This simple strategy showed annualized return of 22% against a max drawdown of 26% and a Sharpe ratio of 1.1. This is before fees, so you’ll need to shave a bit on that, but it’s still better than most do in real life. Against that backdrop, do you really want to spend more time investigating the merits of exponential moving average versus simple moving average, RSI versus MACD, Bollinger Bands versus Keltner channels etc?
These rules shown here are of course not perfect. They weren’t meant to be. They’re just a demonstration how just how simple trend following can get, and still work. The rules do make for an interesting starting point though. They don’t need to be modified all that much to become quite interesting as a real trading strategy.
What matters are broad concepts. Get the concepts right, and it will be simple to construct rules around them. Most hobby traders fail because they are obsessed with some secret black box rules that would solve all of their problems. This is a myth created by people who wants to sell useless trading systems at high prices. If you really want to understand trading, you need to move beyond these myths.
Some trading strategies can get a bit complex, but rarely for the reasons that people outside the industry would expect. Practical issues are often a cause of complexity for instance. Rebalancing, portfolio constraints, risk management etc. can add complexity.