Analysis paralysis is the tendency to spend too much time analyzing and assessing market data and trading strategy to the extent that one finds it difficult or is unable to make a final decision.
This is a dilemma for traders because if they don’t decide whether to enter or exit a position, nothing will take place.
When a trader has an excessive number of indicators on their charts, analysis paralysis is more likely to occur.
In the end, traders are overwhelmed by the sheer number of buy/sell signals they receive and aren’t sure which ones to trust.
When it comes to some traders, delaying their decision may end up delaying their entry or exit from the market at an opportune time.
Other traders may not be as fortunate. They may cease trading entirely, causing them to miss numerous profitable trading opportunities. The risk of them quitting trading is higher if this happens.
What causes analysis paralysis?
Simply put, individuals are drawn to the prospect of having more options available to them. Having too many options can cause you to get paralyzed by the sheer number of possibilities available to you. Studies have shown that having an excessive number of options might lead to unsatisfying results.
We’re hardwired to believe that the more choices we have, the better off we’ll be able to make decisions. That’s not quite correct. It’s far more common for us to experience information overload as a result. We become paralyzed by the wealth of information available and are unable to select the course of action that is best for us.
Oddly, despite our preference for more options, we are more likely to make a decision when faced with fewer possibilities.
How to cure analysis paralysis
Overthinking is a problem for all traders, but technical traders are particularly prone to it. These people are usually well-educated, ambitious, and meticulous. The inclination to over-analyze everything is quite strong if you have any of these personality traits.
Below are some helpful hints on how to avoid becoming paralyzed by your own analysis.
Develop a trading strategy
Making a trading plan and following it can make your entries much more efficient and objective. The objectives and goals you set for your trading plan will make it easier for you to identify trading opportunities that meet your criteria.
Analysis paralysis can be avoided if you know what you’re searching for when you trade. That being said, your trading strategy should not be overly prescriptive; instead, it should allow for some leeway in case you miss out on any trading opportunities.
Avoid using indicators whenever possible
It is better to trade forex based on price action if the results of employing indicators do not satisfy you.
In the opinion of some seasoned investors, new traders should begin trading without indicators before moving on to using them.
Thus, you may learn how the market moves and concentrate on current movements rather than indicators.
Ensure that your charts are tidy
Analysis paralysis is set in motion by an overabundance of signs and a disorganized look.
Using a pricing chart, you may display critical information in a clear and concise manner. There are a few straightforward layout guidelines that can help with this.
- Distractions should be kept to a minimum by using neutral colors. Flashing lights Bright colors can be distracting and even harmful if used in excess.
Use a maximum of three indicators in every chart and pay attention to them. Massive volumes of quantitative data are difficult to digest all at once. You can save time and effort by focusing on a small number of indicators.
- Do not open too many charts at any one given time on your screen at the same time. To avoid feeling overwhelmed, try focusing on a few markets or technical aspects.
- Removing 95% of the tools from charts may be challenging. Therefore the best approach is to remove one element at a time.
Don’t delete everything at once; start with the elements that aren’t absolutely necessary, and as your decision-making improves, add back in some of the tools you’ve removed, if necessary.
Once you notice that removing some elements has improved your trade, it’s much easier to reduce more of them. However, you must give yourself time to see these benefits.
Being organized is key when trading in real-time. The decision-making process is made easier when presented with a clear visual display that removes distractions.
Employ expert advisors (EAs)
EAs are trading bots programmed to track market activity and identify signals to enter or exit different positions. They are an effective way to remove emotion-driven decision-making in your trading because they operate on the objectivity of the specific strategy they are programmed to execute. There are various brokerage firms that offer EA services on their trading platforms, but do your due diligence to ensure that you choose a reliable and competent service provider.
In summary
Trading entails the ability for traders to make split-second decisions. With your eyes glued to too many charts, you can’t make quick decisions.
Keep in mind that the forex market is extremely volatile, and prices can change very fast. It’s important for traders to understand that technical analysis isn’t an exact science. In the end, it’s all about the odds, not 100% success. It’s up to you whether or not to take action based on that information.