The Danger of Complexity
Below, a good argument for the KISS principle, and an equally good argument to be skeptical of most "indicators", or economists spouting crazy complex theories, or whatever other example you prefer.
I actually, back when I was starting out, bought a book called "The Encyclopedia of Technical Market Indicators", a book which managed to show that most indicators don't do much. The only ones it found that did something were Wilder's RSI when it moved over or under 50, simple moving averages, and a weird little filtering technique that some folks use on the Nasdaq, where they buy when it goes more than 4% higher than its previous low, or if it moves down 4% from a new high they sell, and stay sold until it moves 4% higher than where the signal was given, or the lowest low after the signal if the market moves down subsequently. This is done on a weekly closing basis only.
All of these techniques are very simple. None of them involve larding on things like "oversold" and "overbought" levels on the RSI, or any of the other stuff folks pile on, including me of course, although I at least have never been guilty of using the overbought/oversold nonsense on the RSI. I invented my own nonsense, and suffered accordingly.
The formula I had my son work out and that I mentioned early on, is actually very simple arithmetic, and I use it very simply: if it's positive, it means buy, if it's negative, it means sell. The intellectual muscle is in the idea (also a very simple idea, by the way), not the implementation. (It was tough to figure out the formula because it's being used against a random series of numbers, not a simple sine wave.)
The argument against complexity, and for a healthy dose of skepticism, comes from a favorite book I have,
Pragmatics of Human Communication. It's chock full of dazzling little insights, like the following:
That there is no necessary relation between fact and explanation was illustrated in a recent experiment by Bavelas (20): Each subject was told that he was participating in an experimental investigation of "concept formation" and was given the same gray, pebbly card about which he was to "formulate concepts". Of every pair of subjects (seen separately but concurrently) one was told eight out of ten times at random that what he said about the card was correct; the other was told five out of ten times at random that what he said about the card was correct. The ideas of the subject who was "rewarded" with a frequency of 80 per cent remained on a simple level, while the subject who was "rewarded" only at a frequency of 50 per cent evolved complex, subtle, and abstruse theories about the card, taking into consideration the tiniest detail of the card's composition. When the two subjects were brought together and asked to discuss their findings, the subject with the simpler ideas immediately succumbed to the "brilliance" of the other's concepts and agreed that the latter had analyzed the card accurately.
