Know more about Occam's Razor and its Importance in Forex
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Occam's Razor is a line of reasoning suggesting that the simplest answer, to a problem or question, is often the correct answer. Occam's razor, also known as "law of parsimony" is a problem solving principle attributed to William of Ockham (1287-1347), who was an English Franciscan friar, philosopher and theologian. The principle can be interpreted as stating that "amongst competing hypotheses, the one with the fewest assumptions should be selected".
Occam's razor is used to guide scientists in the development of theoretical models. Occam's razor suggests that for each accepted explanation of a phenomenon, there may be an extremely large number of possible and more complex alternatives; we can always burden failing explanations with extra hypotheses to prevent them from being falsified. Therefore simpler theories are preferable to the more complex, as they are more testable.
We face making many key decisions, which are also critical success factors, when we consider trading as a part time, or full time occupation. Such as:
• Which broker we choose,
• How much money will we commit to the project?
• How long will we persevere?
• What type of trader we'll be; scalper, day trader, swing trader, or position trader
• How many instruments we'll trade
Like many phrases that are used in trading, the phrase; "less is more" is a valuable, overused and equally misunderstood statement, which is worth closer inspection in relation to our trading.
Without a doubt, retail traders can all trade smarter, by trading less and be more profitable. For example; the costs of taking several trades (some profitable, some losses) on the same trend, can often work out less profitable than staying in the same trade and on the same trend, until its exhaustion. There's also another "less is more" trading opportunity worthy of consideration; trading one Forex pair only and trading it using only one strategy, potentially off one time frame.
Statistically it's proven that, when measured over a reasonable period of time, perhaps a twelve month period, the spreads on the euro (EUR/USD) are consistently the lowest in FX. It's common to witness spreads lower than one pip, occasionally as low as 0.1 pip, in times of increased volatility in ECN trading environments. That one prevailing condition should be noted as a critical success factor previously mentioned and lend support to our Occam's Razor trading ideals. Similarly there is a tendency, when we become deeply involved in FX trading, to over complicate the challenge, rather than looking for the simplest solution. It's imperative that traders consider the damage trading exotic currency pairs can do to their bottom line balance. For example; the difference between trading EUR/USD or EUR/NZD can average 4 pips per trade, that's a huge difference, when measured over a series of perhaps fifty trades.
From an early age we're conditioned to apply the words and concept of "hard work" with success and rewards. Therefore trading Forex must surely be difficult if we are to be profitable, as nothing comes easy. The occupation of trading must be: stressful, exhausting, a challenge that only a small percentage of: gifted, brilliant, technicians can master.
The reality; that many successful retail traders only spend minutes monitoring their actual positions, they don't spend hours hunched over their keyboard with eyes glued to their three monitor set up, often comes as a huge shock to many novice traders. However, it's equally true to suggest that traders who have mastered their technique, who've developed an edge, whereby their monitoring only takes up minutes a day, will have put in the dedication over many years, in order to reach this elevated status.
One common trait successful traders possess is logic, they apply it permanently in all their decision making and it is a logical decision to trade one FX pair singularly (as opposed to several) rather than incur unnecessary stress and over complication. Further, trading one pair, using one strategy, trading off one time frame, can prove to be more profitable than trading many pairs off several time frames. If you're a novice or retail trader, then why not consider joining the legions of successful traders who only 'trade the euro"? It might be one of the more enlightened trading decisions you ever take. And if you make a stunning success of developing an edge trading this one pair in isolation, then stick with it; if it's not broken then it doesn't need fixing.
This article was written by Harris Adams for on .
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