Analysis paralysis is the trading version of information overload. A trader is overwhelmed by multiple scenarios and possibilities of movement in price action, for every case there’s an opposing view in the mind of the trader. The conflicting views create confusion and make it almost impossible to take action and execute trades with clarity and discipline.
I had my fair share of analysis paralysis before I learned to keep things simple and stay focused. I used to delve in the details putting together speculative theories that sound great, but when it came down to pushing the button to execute a trade, I couldn’t do it!
1. Know What to Look ForThis obviously involves referring to your trading plan which outlines your trading style and mentions in detail the patterns or conditions you look for in a certain trading instrument to execute your trades. For example, whenever I’m looking for Gartley Patterns to trade, I always look for the impulse advance or decline that breaks the previous price structure and starts a new trend.
This gives me clarity when looking at charts because now I don’t have to scan through every bar/candlestick. Instead, I only look for the move that broke previous levels, then see if the Gartley conditions apply and asses my reward to risk ratios.
2. Focus on The Task at HandThe incredible availability of information in this age make it very hard not to get distracted by something, think about it for a moment, then google the term or idea, read a little here and a little there… And before you know it, you forget what you were looking for in the first place, or you wasted an hour or two on something irrelevant to your trading AND you haven’t taken the trade yet.
Keep a note book handy, if a certain idea occurs to your mind and you think it is worth researching, write it down. Make a deal with yourself that you only research ideas after you finish your current task, which is getting your analysis done and your trade executed.
Getting into the habit of researching only after you’ve finished your trading task at hand will also increase your discipline. Deep into your mind it will become some form of reward to look for ideas with passion after you’ve put in the important work.
3. Take the Top-Down Approach
Start from the top level, and drill down lower. It could be starting with the Macro levels if you are into fundamentals or starting with higher time frames or trend indicators in the technical field.
This will not only make it easier for you to analyze markets and trading instruments, it will also keep your attention on the bigger picture by giving you direction. This will make it harder for you to get distracted while analyzing markets.
4.Turn the TV Of
I strongly believe that the financial media is misleading at best. Looking at financial news channels is a leisure activity for me. I know that’s a bold claim right there but it comes from years of observation.
What normally happens is you have this great trade setting up, you’ve calculated your potential risk and potential reward, everything is set and you are ready to execute. Now in the background the TV is on and a financial news channel mentions stock XYZ which you’ve just completed the analysis for. Your mind picks it up quickly because of the focus and the recency factors, you pay attention to the news and an analyst presents this detailed view that he backs with evidence and extensive study. Sound good? Unfortunately, his case is completely against your analysis.
Even if your are not easily convinced by him. Trust me, when the doubts start creeping to your mind, this little piece of information will be 10 times as important as you thought it would be. Plus, why consume garbage information if you don’t need it in the first place?
5. Simplify, Simplify and SimplifyComplex things aren’t always better. For me, I think that the more simple things are, the more profound they will be. Generally traders are attracted to complex methods and systems. Complexity however introduces risks of over-optimization and curve fitting, which make systems sensitive to any change in volatility or market behavior.
Choose the methods that make sense to you, that you feel comfortable using and are good at. The possible scenarios will be clear to you, therefore you will be able to effectively assess situations and risks then execute with conviction.
Remember trading is simple, it might be a tough business, but the principles are simple.
No comments:
Post a Comment