Analysis Paralysis

Discussion in 'Psychology' started by Joe Ross, Jan 17, 2007.

  1. This question was sent to me from one of our students: “Hey Joe! Sometimes I find myself hesitating about taking a trade. Could it be I have analysis paralysis?”

    If you’re going to trade, you need to be able to take decisive action. Carrying out your trading plan often requires that you make quick decisions. But when your money is on the line, it is sometimes difficult to make such decisions.

    We all have a tendency to want to avoid risk. It could be that you are trying to deal with the fear of loss by over-thinking and over-analysis. You may spend a lot of time studying indicator after indicator, even though most are really measuring the same thing. For example: RSI, Stochastics, MACD, DEMA, and others all measure momentum. True confirmation cannot be obtained when one confirms the other. It isn't necessary to over-think and over-analyze. It is more useful to go ahead and execute a trade and then move on.

    It may be useful to conduct a thorough analysis before making a decision, but it isn't worthwhile becoming completely paralyzed by it.

    In the end, becoming a successful trader requires taking risks. Putting your money on the line is hard to do, especially for a beginning trader who knows he or she is likely to lose it. That's why it is vital to control risk and trade with a detailed trading plan. It won't prevent losses, but it will minimize them. If you can continue to practice trading, you'll survive the learning curve and be one of the few who become winning traders.
  2. 2 minute drill.

    If you do the two minute drill before placing (or not) a trade, it does wonders for decisiveness.
  3. Had a user on my site today say the same exact thing. We only put on 3-4 trades a day so if a user misses 2, of course these will be the winners. The losers seem more attractive because they are usually chasing trends or a very obvious entry. I'd like to just say 'dont feel that way' but I'm not a psychologist and have not taken any courses on the subject. I do enjoy Trading in the Zone by Mark Douglas.

    CajunSniper / Administrator-Trader
  4. This is a common problem for many traders. I've found it very useful over the years to look at trading as placing a series of loaded bets, rather than paralyzing yourself by trying to know in advance that trade is a winner, which is clearly impossible. If you had a set of loaded dice that won 80% of the time you would never hesitate to make the next roll! It wouldn't matter if the trade won or lost because the protracted long-term average would ALWAYS MAKE MONEY FOR YOU! If you think long and hard enough about trading and have developed good market feel based on years of experience you should see trading as nothing more than placing a long series of bets that are guaranteed to win over time. That is the professional's perspective. If you try to be right or try to avoid normal risk and uncertainty you are at a great disadvantage in a market of uncertainty.

    Another helpful idea is to go for small,easy to get price objectives, over and over and make money on position size rather than being a Johnnie One-Lot and trying for large swings. Most professional traders hate risk just like everybody else so they go for small scalping moves rather than trying for the big score each time. The smaller the price objective, the greater confidence you will have in obtaining it and the less fear you will feel in placing the trade. This is axiomatic. In this case less can be more in the long run.

    Personally I scalp the 30-yr ECBOT Bonds for 2 to 3-tick profits 4 to 8 times per day, depending on market action. I was never one the be able to "stick and stay and make 'em pay." Just my personality makeup. I hate time and risk exposure. I don't like killing myself emotionally by trying to get the last possible tick out of a move. I like to grab 2 or 3 and go and look for the next set-up. Trading should be relatively easy to do, like breathing. If you try for too large profits analysis paralysis can get you. Personally, I find my ability to pull the trigger is inversely proportional to the size of the price objective. This is much easeir to do with today's ultra-competetive commision rates.

    Trading is a game of probability averaging, not winning trade selection. Your job is to make the trades and trust the law of averages to do the rest automatically. If you try to pick winners instead of just betting the loaded odds you will be tempted to over-analyze each trade and may succumb to a severe case of over-analysis-paralysis and lose by default. Play percentage baseball and refuse to worry about an occasional strike-out.