Analysis Paralysis

Many traders suffer from too much analysis. They look at so many indicators, chart patterns, fundamentals, news, insider trading activity, short interest and a host of other information. So much that they can no longer see straight. This constant over-analyzing develops into a condition we call "analysis paralysis". And becomes a huge psychological barrier.

Carefully analyzing the possible consequences and outcomes of trading decisions is certainly a very smart thing to do but, it can become unhealthy when it is overdone. When it comes to trading, it's important to have a clearly defined trading plan. You must be as certain as possible that any given trade is not going to wipe out your trading capital. That is one of the reasons we suggest using stop loss limits when trading. These stops, when used correctly, clearly define the signs and signals that indicate a trade is not working, suggesting that the trade should be closed out in order to protect your trading capital. It is important to realize that you might be wrong not only about the direction of the stock but you could also be wrong about the timing of the entry of the trade. Either error could end up in a losing trade.

Trading, by its very nature, is uncertain. There is no security for traders. Every trade is a new event that must be controlled. As a stock trader we do not have the luxury of living from past accomplishments. Each day the business starts over again and the trades we made yesterday will not affect the trades we will make today. However, they could affect our decision making process. They should not have any bearing on our trading decisions today but psychology always weighs heavy on our thinking and it's hard to fight it off. The only legitimate things that should be carried forward into the next trading day are experience and, hopefully, lessons learned.

As you analyze your trades before hand, make sure you include a mechanism to get out of the trade if it should go wrong. Where will you get out of the trade? That is the most important part of trade analysis. Almost everything else is a distant second. After all, capital preservation is the most important aspect of trading. All other information is in the analysis of the trade does not matter if you can not limit a loss.

David Colletti

The Headquarters for precision trading in real time.