I have seen too many traders that randomly add condition after condition to their trading strategy, hoping that it will increase their hitrate. What they are trying to do is to add assumption after assumption to their hypothesis, until their hypothesis (“price will move in to this or that direction for this or that amount”) is hopefully correct more often than not.

Going this way usually ends in paralysis through analysis or in total chaos because there are so many conditions when entering a trade that it is impossible for a human brain to follow the system, thus inducing mistakes.

 Enter: Occam’s Razor

Occam was one of those scholastic philosophers, living around 1300 A.D. He developed a principle called Occam’s Razor which states that “among competing hypotheses that predict equally well, the one with the fewest assumptions should be selected. Other, more complicated solutions may ultimately prove to provide better predictions, but—in the absence of differences in predictive ability—the fewer assumptions that are made, the better.” But Occam was not the first, even Aristotle, who was living a mere 2000 years ago, theorized about this concept.

Now the thing is that of course when you add or remove certain conditions to your trading strategy, the predictive ability of your strategy will vary thus rendering Occam’s Razor seemingly invalid. Seemingly. Because trading is a game of incomplete information, we can never exactly know the predictive ability of a model.

Even after testing thoroughly, we will always only get an estimate (our winrate). Because of this fact you should base your trading strategy on as few assumptions as possible.

Unnecessary Burdens

It will be easier for you to incorporate the strategy. It will also be easier for you to analyse the impact of one of your conditions on your trading strategy. The more complex your model the harder it will be for you to find out where you are leaking money, it’s that easy.

I see too many traders that make life too hard for themself because they add a million conditions to their strategy, without even knowing what one single factor does in terms of adding or removing performance. Sometimes they even have 2 indicators on their chart that show almost the same, or exactly the same.

Conclusion: The fewer conditions the better, if you did your homework

When you start out creating a new strategy, start with 2-3 entry conditions and work it from there. Get rid of recency bias by using a professional trading journal and test new conditions critically before adding them to your model.

Also, do not just focus on the entries, which will often result in making them as complicated as humanly possible. Start working on your RRR and trade management, making entries much less important than they seem to most new traders.

If you are interested to learn more about this topic, you should also read about Solomonoff’s theory of inductive reference – which is the mathematical expression of Occam’s razor. The mathematical application of the razor can be used to calculate the expected value of actions based on the shortest computable models. Which is basically your job description as a trader.