A complex system could result from an effort to integrate all relevant information in one model, but we don’t wish to do that in our trading plan. We can learn from simple systems that have been proven effective in the financial markets that allow you to be observant on market trends and trade profitably.
This is why the KISS method is important.
What is the KISS method?
KISS stands for Keep It Simple, Stupid, and it is a widely used principle across many industries. When applied to forex trading, you keep all trading aspects simple — from your manner of thinking about price movements to how you perform your trades. Once you have decided your system rules, you just have to impose discipline and stick to them.
Let’s have two examples of how you can shift your thinking towards quick and easy analysis: When marking levels on a daily chart, you can avoid confusion by following the one-level approach. You just have to identify that one level in your forex chart that best highlights your analysis. You may want to extend this a little by marking the next support or resistance level closest to your analysis, but there is no need to go any further than that. An extra set of eyes from a fellow trader to check your chart markings and get his opinion on what your markings tell him to gauge the understandability of your charts.
The second thing to do is to stick to one chart type. While there are a number of chart types that forex traders use, knowing how to interpret candlestick charts is essential. Candlesticks can provide you with four important data points – the open, close, high, and low price. With this basic set of data, you can already identify market signals. For instance, if the day ended with a price that’s lower than the price it opened, it gives you a clue that the market is going bearish and is stepping downward.
What is the proven system that applies to KISS?
The So Easy, It’s Ridiculous (SEIR) System is an application of the KISS trading method. The Relative Strength Index (RSI) will still be used, but as an extra confirmation tool to validate our trend’s strength.
There are five rules under SEIR:
We will adopt the swing trading system, and a daily chart will be our basis for trading.
To identify a new trend the earliest time possible, we will use simple moving averages. We will continue to look at the Stochastic to determine feasible trade entry upon reaching a moving average crossover. This helps identify and then avoid overbought and oversold areas.
After the trade setup, we now determine our risk for every trade. For this system, risking 100 pips in every trade is tolerable. If you use a higher time frame, you can afford to risk more pips because gains are typically larger than trading on smaller time frames.
We establish clear rules for trade entry and exit, as either can happen anytime.
Finally, we will test these rules using manual backtests. We will also trade live via a demo account for a month or two. These will bring confidence that profits will be reaped in the long-run as long as the rules are followed.
The key to get started is to trust the system. There may be doubts and fears as to its reliability, but you can personally validate its trustworthiness. Backtesting manually and trading with a demo account can help you do this.
How does the system work?
We can answer this question by doing a manual backtest in two possible trading scenarios:
You are under a long trade setup for the EUR/USD pair. Using a candlestick chart, you looked at your indicators a month ago. Stochastic shows an upward momentum, which means the currency pair is not overbought. To backtest, jot down at what price you probably had entered, the stop loss, and exit strategy. You then move one candle higher to see what happens. Assuming the Stochastic showed a downward momentum, you would have made additional pips.
Assuming there was a moving average crossover, the Stochastic shows downward momentum, hence, not oversold and RSI was below 50. This is a perfect time to enter short. We will write down our entry price, stop loss and exit strategy, and then go one candle ahead to see what happens. Assuming the trend remained strong and the pair dropped several pips before the next crossover, you’ll know you’re on the right track.
Learning this SEIR system may require time, but with manual backtesting and trading with a demo account, you’ll definitely get used to the rules. What you need is a clear and calm mindset to begin, analyze, and make trade decisions. The simplicity of this SEIR system can help you achieve that.