Simplify Your Trading Using Occam’s Razor

Simplify Your Trading Using Occam’s Razor

Occam’s Razor, also known as the law of parsimony, is a philosophical principle that is attributed to William of Ockham, an English Franciscan friar, philosopher and theologian.

The principle states that among competing hypotheses that predict equally well, the one with the fewest assumptions should be selected.

Said another way, the simplest solution is always the best.

Like all mental models you can apply it across many disciplines but we like to explore how we can use Occam’s Razor to help us with our trading and in particular our trading process.

Simplicity Over Complexity

Simplicity is the ultimate sophistication – Leonardo Da Vinci

A simple, robust trading process should be the goal of every trader. A simple trading process by its very nature will be more robust than a complex one and robust processes will allow you navigate the dynamic nature of markets. A simple trading process is also easier to follow than a complex one.

You should aim to reduce the amount of variables you use in your process to its minimum. You’d be surprised at just how simple some of the trading plans are of some of the best traders I know. You just don’t need complex, multivariate strategies to succeed in the markets.

A simple trading process has the added advantage of being easier to test than a complex one. When you increase the complexity of your process it becomes much more difficult to test.

Simplicity is Not Easy

Simple and easy are not the same thing. Despite this the two words are frequently used interchangeably. Easy is comfortable and achieved with little effort while simple is uncomplicated.

A simple process is not easy to develop. Developing a simple process cannot be achieved without effort. It can often take years to develop a simple process that is robust enough to use consistently. Sometimes you must explore every avenue before you arrive on something that works.

Even then once you develop a simple plan it requires a level of discipline to follow which is not easy.

Danger in Oversimplifying

There is a danger that Occam’s razor can lead you down the road of oversimplifying the process. Simplifying the process is desirable but it has its limitations because there is no escaping the basics.

There will be a certain amount of complexity required to solve any trading problem, this is known as intrinsic complexity. Accidental complexity is anything that does not contribute to solving the problem. Your focus should be avoid accidental complexity and embrace the intrinsic complexity.

So with that, I leave you with Einstein’s famous quote:

Everything should be made as simple as possible, but no simpler.

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