In the arena of active futures trading, technical analysis is king. It’s certainly a popular and viable trading methodology, but the discipline has one major pitfall: analysis paralysis. In this blog article, we’ll break down this concept and give you a few tips on how to overcome analysis paralysis.
Investopedia defines “analysis paralysis” as a “situation in which an individual or group is unable to move forward with a decision as a result of overanalyzing data.” In simpler terms, it’s what happens when traders fail to act because of overthinking.
For active traders, analysis paralysis can undermine any strategy and be a true performance killer. Missing out on good trade setups and letting losing positions run are two products of the indecisiveness this impediment brings.
Unfortunately, technical traders are especially susceptible to overthinking. Typically, these individuals are intelligent, driven, and detail-oriented. Given this collection of personality traits, the tendency to hyper-analyze everything is very real.
Sound familiar? Don’t worry, there’s good news: You can learn how to overcome analysis paralysis. Here are a few tips on how to take your analytical game to the next level.
As the old saying goes, “cleanliness is next to godliness.” When it comes to pricing charts, this axiom is certainly true. An abundance of indicators, as well as a disjointed appearance, set the stage for analysis paralysis.
A pricing chart should put important data front and center in an easy-to-read format. This may be accomplished via a few simple layout guidelines:
In live market conditions, staying organized is the name of the game. A clean visual display promotes clarity by removing clutter from the decision-making process. For technical traders, chapter one of any book on how to overcome analysis paralysis should address streamlining the pricing chart’s presentation.
Any trades are educational examples only. They do not include commissions and fees.
If you’ve ever traded two or more technicals at one time, then you’ve likely witnessed conflicting signals. Conflicting signals occur when one tool or indicator suggests the opposite action of another.
For example, assume that Sam the stock trader is analyzing the intraday price action of E-mini S&P 500 futures. Sam’s short-term trading strategy incorporates stochastics, moving averages, and pivot points. The E-mini S&P 500 is on the bull, posting a strong uptrend on the five-minute chart. Sam is faced with the following quandary:
The example above is a classic signal conflict. The Stochastics suggest a short-term sell, but momentum above the 200-day moving average indicates a significant bullish breakout. Sam’s pivot points are largely a nonfactor, but they specify that the daily range is not yet in. So what can Sam do?
Well, that’s the million-dollar question. If you’re wondering how to overcome analysis paralysis caused by conflicting indicators, then removing ambiguity is the answer. To accomplish this, Sam may simplify things via the following actions:
It’s important to remember that the job of a technical indicator is to place streaming price action into a manageable context. By doing so, indicators add value to the strategy by promoting consistent trading decisions. If conflicting signals regularly plague your trading, it’s time to simplify your technical approach.
Not being able to execute trades confidently and in a timely fashion is a major problem. It can undermine performance and demoralize even the most committed trader. Fortunately, education can help.