Analysis Paralysis: Market Trading and Knowing When You’ve Done Your Homework
I ran across this image on Reddit inspiring this little article to ensure all you traders out there remain one thing: decisive.
If you’re just jumping into the world of trading, you’re probably trying to find the best way of going about your analysis. Everybody goes through this, and you are not alone.
But what’s the right amount of analysis? Well, the first bias you must let go of as a trader is one thing we humans struggle with: Being Right. By being primarily an option trader in regards to equities, I know that although the probabilities are in my favor, I will ultimately be wrong a number of times. This is the name of the game.
Where most traders begin to fall into the category of the 90% who fail at this business is when they become frustrated with being wrong. You may have put countless hours of research into the hottest stock, yet it still went against you. This leads to the second bias you must let go of: The Market is Not Rational. If you can separate yourself from those two biases, you’re on the right path.
One of the mantras you’ll always hear in trading is “remain consistent” as if it’s a broken record. Yet, many struggle with this because their approach to trading becomes emotional without calculated risk and understanding of the upside as well as the downside. Our book specifically has a chapter solely dedicated to discussing approaching trading as a business.
Because our option trades are short-term in nature we look at the following:
– What sentimental news, announcement, or product figures are driving the stock in a particular direction?
– Where is our fractal support and resistance?
– Which direction is the trend?
– What probability sets me up for a successful trade with a good reward:risk?
– Where is my stop-loss point and how does this alter my probabilities or reward:risk?
This analysis takes me no more than 10 minutes before I start placing orders. There is always a better alternative somewhere, so I hunt for about 5 minutes before conducting my analytical process between 1-3 tickers.
Now, this isn’t a sales pitch to specifically use my strategy. Market trading is a business unique to each trader behind the screen, and your own tolerance to risk as well as what types of securities you choose to jump into is your own call. But what I am saying is this: Have a checklist. If you have a checklist like the one above with your specific trade entry criteria, then you won’t second guess yourself. By writing it down, you force yourself to be held accountable to your actual strategy, versus your OPINION on that specific ticker that could be affected by an emotional response.
If you’re going over 15-20 minutes, you’re paralyzing yourself. Take a breath, and before placing another order, get yourself some training through books, videos, or podcasts. Ours extensively covers our techniques on our Products page. If you truly have a good foundation of trading education, regardless of its origin, then you’ll have been taught how to have a trading plan, and will not fall into the Analysis Paralysis trap.
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