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Analysis Paralysis


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.

Joe Ross
Trader, Author
quote:
RSI, Stochastics, MACD, DEMA, and others all measure momentum. True confirmation cannot be obtained when one confirms the other.

That's an important point that many new traders don't pick up straight away. Here's a simple analogy:

We decide if we're going for a swim based on 3 factors:
  1. Is the water temperature over 25C?

  2. Is the water temperature over 77F?

  3. Is the water clean?

If all 3 factors are true then we go for a swim. However, you can easily see that questions 1 and 2 are exactly the same but using a different scale. One makes the other redundant.

So what Joe is saying about many indicators measuring momentum, you rarely need more than 2 momentum indicators on your chart.
...it is vital to control risk and trade with a detailed trading plan. It won't prevent losses, but it will minimize them.

Great advice Joe ! Thanks for your contribution.