Finding it hard to jump into the market? Too afraid to make a decision on whether to buy or sell? Then you’re probably suffering from the dreaded analysis paralysis.
But don’t worry, there are plenty of ways to overcome analysis paralysis.
Largely, it comes down to how people make decisions and traders need to learn how to limit the effects of convoluted decision making.
In this article, we’ll explain just what analysis paralysis is in forex trading and how to fight back and stop it from preventing you from making trades.
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What is analysis paralysis?
In short, it is the process of over analysing and evaluating the data you have to make a decision which results in prolonging the decision-making process or stopping it altogether.
Analysis paralysis is problematic for traders because if they do not make a decision to enter or exit a position, it won’t happen.
Typically, analysis paralysis will take place when a trader has too many indicators on their charts.
What happens is they all give off too many signals to buy or sell and a trader is left confused, unsure of which indicators to trust and which to dismiss.
With some traders, this may only prolong their decision, but even if this happens, they will likely not enter or exit the market at a favourable point.
Other traders might not be so lucky. They may completely stop trading and miss opportunity after opportunity.
When this happens, they are more likely to quit trading for good. Such traders will not last long.
Why do so many traders suffer from analysis paralysis?
Quite simply, people are attracted to the possibility of having more choices.
We are psychologically wired to think the more options we have, the better decisions we make. Unfortunately, this isn’t quite true.
Usually, what happens instead is that we get information overload. We become overwhelmed by all the information and can’t decide which option will work for us.
Interestingly, although we prefer more choice, when we have fewer options to choose from, we are more likely to make a choice.
A great example of this is professor Sheena Iyengar’s jam experiment, which set out to explore how choice affects our decision-making process.
Iyengar’s experiment had two parts. The first gave people a choice of 24 different jams. She found that although the selection drew in more people, they were less likely to buy.
In the second part of the experiment, they offered only six jams to choose from. She found that although it drew in less attention, people were more likely to make a decision and buy.
Therefore, it is logical to conclude that while we like to have many options at our disposal, the more choice we have, the harder it is to make a decision.
Why is analysis paralysis so bad?
You must remember that the forex market is highly volatile, and the market moves very quickly.
A key thing traders should know about technical analysis is that it is not an exact science. It largely boils down to probability, not guaranteed success.
Further to that, indicators are not signals to buy or sell. They are technically a measurement of the market.
They are only showing you that certain conditions have emerged in the market. It is down to you to make the decision of whether or not to act on that information.
When you have too many options, you are more likely to freeze as you ponder all your choices. Too many options has also been linked to less pleasing outcomes as well.
How can you prevent analysis paralysis?
There are plenty of ways traders can get over the horrid analysis paralysis. Here are some you can explore.
Stop believing that every decision needs to be perfect
Your trading decisions may not always be perfect but if you do not make a trade, then you will never make any money and learn how to improve.
You may find yourself stuck between two decisions and neither are perfect, but every decision has pros and cons and one will always be better than the other.
In real life, clear and perfect trading decisions are rare.
Taking risks is one of the most important parts of trading. Without risk, you will not make anything.
Of course, it would be great if all trading decisions didn't come with risk, but unfortunately, they do.
Risk also helps you make better decisions. If you didn’t feel there was any risk, you wouldn’t care if your trade was successful or not. Some tension is necessary.
It is important to consider; what could go wrong based on the decision I’d make? Is it really that bad?
By looking at the decision’s pros and cons, and weighing them, you can speed up the decision-making process. Don’t get stuck thinking about the negatives.
You can also set yourself a time limit to come to a decision to force yourself to act. A time limit will act as another layer of pressure that you might need.
Have a trading plan
Having a trading plan is something we repeat a lot at Trading Education, but having one can greatly improve your trading.
Your trading plan should have objectives and goals, and with these in place, you will more clearly see the opportunities that fit into your criteria.
If you know what you are looking for when you trade, you will be better able to fight off analysis paralysis.
That said, your trading plan should not be too rigid, it should allow for some flexibility or you may not find opportunities to trade and analysis paralysis will win.
Simplify your trading strategy
Another vital thing traders can do is simplify their trading strategy. The simpler the decision and actions you make, the easier it is to follow through.
The more components there are to your trading strategy, the more things that can go wrong.
A trading strategy needs to be lightning fast. With a simple trading strategy, you can be quicker and make sure you get in and out of the market as fast as possible.
Look for confluence
Traders can prevent analysis paralysis by looking for confluence. Confluence is where two (or sometimes more) points of technical analysis coincide, and both give you a signal to buy or sell.
Ideally, you should keep this to two or three indicators, though confluence is generally defined as two points.
What you can do is use one indicator to scout for opportunities and then the second indicator to act as confirmation that it is okay to make a trade.
Training yourself to find confluence can take time. You need to find what indicators work for you and which ones you have a greater understanding of.
Understand your trading psychology
Analysis paralysis may also have its roots in trading psychology as well. Potentially, you may have issues with making decisions.
Some trading psychology experts, such as the late Mark Douglas, believe that some of the difficulties traders have, relate to their childhoods.
Such issues can relate to dealing with failure or overcoming mistakes.
We might not want to make a decision because we are afraid of the outcome being bad which means we failed and therefore cannot trade.
We then may spread that negativity onto other aspects of our lives.
Learn to trade without indicators
Some professional traders say that beginners should start off learning how to trade without indicators first and then move onto using indicators.
This is because this way you can learn how the market moves and focus on current movements instead of past movements.
You can use price action as a kind of signal and back it up with an indicator.
Sometimes the best trade is no trade
Not making a decision is itself a decision. And in some senses, it can be the best decision because if you are not confident in your trading plan, then making a move can be disastrous.
Sometimes the best trade is no trade holds a lot of truth. Professional traders are known to trade less not more.
They are more concerned about losing what they have than gaining more. Amateur traders can sometimes trade too much which exposes them to risk.
But don’t think analysis paralysis is an issue of confidence. Rather it is an issue of being overwhelmed and a boost in confidence will not necessarily fix it.
That said, if analysis paralysis is not dealt with it can seriously harm your confidence which you need to step into trades.
Regaining your confidence can take a lot of time. A great way to do this is when you return to trading, make smaller trades.
This way if you do make some losses they will won't be as damaging to your ego as big trades.
Educating yourself can boost your confidence in your decision making.
If you have trouble making trades, it may be worth learning more about trading until you feel comfortable with making a trade.
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If you remember anything from this article, make it these key points.
- Analysis paralysis is when traders over evaluate a situation and are unable to make a decision. Some traders may miss the right opportunity to enter the market, others may never make a decision at all.
- Too many indicators are the leading cause of analysis paralysis. Ideally, you should use only two or three indicators.
- Develop a trading plan and keep it simple. Too many components to your strategy can prevent you from making a move.
- If you don’t have confidence in your trades, you may need to further your forex trading education. By further understanding how the market works, you can boost your confidence.
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