How To Avoid Analysis Paralysis In Trading

Known as "analysis paralysis", traders commonly can end up questioning how much information is actually needed to make trading decisions. There are ways to manage this...
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An experienced currency analyst that specialises in short term sentiment and news driven trading.
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We have a great question here from Rolando, who asks how much information is actually needed to take trading decisions? Have I ever felt “over-flooded” by so much info that you aren’t able to take decisions? Is the terminal enough info to trade?

This is a fantastic question Rolando, and one that I am all too familiar with, and it’s actually a lot more common than you might think, and is often referred to as analysis paralysis. It’s basically when we are overthinking and overanalysing the available information so much that it prevents us from making any decisions.

Now whether you are looking at fundamental analysis or technical analysis, the idea is the same for both of them, and is either when we try to consider too many variables in our analysis or the conflicting information we get causes us to overthink and overanalyse things that might not be as complex or complicated as we make them out to be, and that causes indecision.

Some examples from the fundamental side could be trying to account for way too many variables than is necessary, which means we go through massive amounts of research on a particular trade that highlights a couple of pros and cons to our trades that we might not have thought about, and that makes us unsure whether the trade is the right idea, or from a technical side you might be looking at a good entry spot but then you go to the daily and see it is showing something else, and then the H4 is showing something completely different or you have indicators where one says buy and one says sell.

It can be quite confusing and more important very energy intensive when we find ourselves in that scenario, because for all the time we spend going through all the info and doing the analysis we end up more confused than when we started and often see us rather be indecisive and unsure.

The challenge with us as traders, is that this can keep us back from great trading opportunities that should have been an easy choice, but instead we overthink and overanalyse and end up missing a perfectly good trade due to it.

I think the key here is to find balance, you see I am an analyst before I am a trader, which means for me, it’s my job to highlight risks more so than opportunities, if that makes sense, so for example, just because something has an upside bias, we need to be aware of the type of factors that can pose a risk to any particular trade, so we essentially go through more possible variables that way than a retail trader might. Now, looking for risks to your trades I think is a very good way of minimising your risks, it’s a good way of doing risk management by being aware of the type of things that can take you out of your trade before you engage the market so that you can better manage positions.

But of course, in doing that, it might mean that you place too much emphasis on the risks as opposed to the logic or premise behind the trade. In my opinion, I would rather err on the side of caution though and make sure that when I engage the market that I am fully aware of the risks so that I have a better chance of letting a trade run into more profit as long as the risks don’t outweigh the premise for entering.

So for example, when I want to take a trade, I prefer knowing what the market participants who are trading against me is thinking, I want to know why someone would be trading against me in a particular position, because it makes us more flexible in our approach to an ever-changing market and it also keeps us safe from confirmation bias where we only want to read and see things that agree with our analysis or our premise for a trade.

But the risks to that is that sometimes we can get caught up in all the information, whether bullish or bearish opinions, and the info can be so overwhelming that we just aren’t sure any more what to do.

Now the one thing that has helped in this area, and I struggled with this a lot and sometimes still do, I think those of us who are more analytical have a tendency to struggle with this a lot more compared to the natural impulsive thinkers, and being more inclined to the analytical systematic way of thinking I succumbed to this a lot of times, and one thing that helped me was realizing that a trade does not have to be perfect, because the perfect trade does not exist.

You see, we so often try to find the perfect trade, the perfect fundamental reason to trade it and the perfect place to enter it, but if perfection is what we want, then trading is going to be an uphill battle, because due to the tremendous amount of uncertainty in the market, there is very rarely a perfect reason to trade, for example there will almost always be a reason for you not to take a trade. There will always be risks associated with that trade, and as long as the reward and premise for entering and keeping in running outweighs the risks then we should be find to trade it.

That constant struggle for perfection can drive us crazy, and we need to realize that there are no perfect trades, just the next trade, and that we can only account for so much.

Another area that helps with overcoming this is having a trade plan. So, you’ve done your fundamental analysis, you’ve written down your premise for the trade and the rationale is solid, you’ve highlighted the possible risks and think the premise outweighs the risk, you’ve looked at the charts according to your trade strategy and it lines up, you’ve identified your risk and you have a positive expectation for the trade in terms of what you are risking and what you think is possible to make on it, as long as it fits into your trade plan then execute the trade.

By having a set plan on how you look to trade, it takes some of the indecision away because you are following a set process for identifying, planning, executing and closing a trade, and if a trade doesn’t fit into the plan you just discard it.

Something that can also help here is trying to identify where the overthinking or overanalysing is coming from. Often times, in my case, when I’ve had a few losing trades I tended to overthink and overanalyse subsequent traders because the fear of having another loser would play with my mind.

So do some introspection and make sure that the reason that is happening is not due to some losses you had before. If that’s the case, the best thing to do is have a reset and make sure your psychology is back on track before you re-engage the market. It’s not always easy, but if you sit down and think about it you’ll often figure out what might be bugging you if that’s the case.

Try to disassociate your next trade from your past trades, for example, know that having losing trades is part of the game, it’s a statistical fact that you’ll have losing trades, even have a few losers in a row sometimes, so it’s not necessarily because you didn’t do enough analysis that you might have had 3 losing trades in a row, statistically speaking having three in a row is very normal for someone who has a 70% hit rate, so it’s totally normal, and the way that can help you know whether it’s just external factors that caused the losses or your analysis, is by making sure you stick to your process and trade plan, if you did that, then it’s probably just the statistics playing out.

That’s where the terminal is so handy in my opinion, because between the daily opening news, and the dominant sentiment theme reports, and the sentiment drivers reports, and the trade ideas and the video commentary and of course the Q&A with the video commentary, you have all the news and analysis you need in my opinion to formulate great trade ideas, and in those times when you are unsure the webinars and Q&A are there for you to use us as a soundboard for your trade ideas. When you’ve gone through your analysis and you’re just not sure, just ask us in the webinars or the Q&A and we can tell you what we think, it’s a great way to help you gain some confidence in your analysis.

So, I hope that helps with the question, any others please don’t hesitate to let us know.

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