Analysis Paralysis: Four Ways to Avoid It

Analysis Paralysis – Introduction

In trading, having a well-defined strategy can help you make decisions. However, occasionally, you will find that there are so many factors at play in a certain trade. This will curtail your decision-making. For instance, assume that you are trading EUR/USD and in one day, there is economic data from Europe and the United States at the same time. In between, there are talks about various issues that have an impact in the pair. Financial players have created a jargon for this scenario. Its called analysis paralysis. It is simply a situation where there are so many information that will hinder you from making a good decision. What do you do when you are in such a situation? This article will highlight 4 main methods you can use to solve the dilemma.

Analysis Paralysis – Develop Strategies for Such Scenario

The first thing you should do to avoid analysis paralysis is to incorporate such scenarios when developing your trading system. The fact is that these situations will always be there. As I have explained before, there is nothing new that happens in trading. What has happened today has happened in the past. Therefore, when you are developing your trading strategy, you should ensure that you incorporate a situation where fundamental analysis and technical indicators will give you many data points. As I have explained before, you should also backtest such scenarios to see if they meet with your trading strategy.

Analysis Paralysis – Weight the Indicators

There are times when the information provided by the technical indicators is skewed. The double exponential moving average will tell you to buy. At the same time, the Relative Strength Index (RSI) will indicate an overbought position. At the same time, the Average Directionary Index will show that a trend is forming. Other technical indicators will then provide various data points that are not in sync with one another. In such a situation, some traders will weight the indicators. They will take say 10 indicators and then rank each of them with the indication. Therefore, 6 indicators will point to a buy position while 3 will show Sell while one indicator will be neutral. In many occasions this usually works. However, you should be very careful when doing this.

Analysis Paralysis – Take a Break

I have said it before that the reason why many people lose money is that they want to do everything at the same time. This is wrong. I have written before that I trade for less than one hour every day and when I make (or lose) my money, I rarely look at the trading platform again. This enables me to have a productive day regardless of the direction my trade takes. In times when there are so much information, I opt to take a break and keep off from trading. In a day, there will always be new opportunities that you can trade with. So, take a break and do something else. Eventually, the news will fade and the technical indicators will produce good signals for you.

Analysis Paralysis – Turn the TV Off

Turn off Bloomberg. Turn off CNBC. While these TV channels provide the best financial news, they have an important shortcoming. They often feature financial ‘experts’. In many cases thee experts provide information that is not correct. I remember a day when I was starting to trade. It was on a Wednesday and we were expecting the inventory number from EIA. In the morning, the news anchor announced that the EIA will announced increased inventory levels. She didn’t state that the number was merely a projection. I then went to my terminal and sold short oil. Later in the day, I lost so much money with that trade. I advise you to switch off these TV channels and make an independent analysis devoid of the financial expert opinion.

Analysis Paralysis – Useful Links