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Winning the War Against Analysis Paralysis

By Robert Colville on November 8, 2014

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Why is it that in life, people go off and decide to jump out of planes, or swim with sharks, but when it comes to trading, they get bogged down in information, battle the dreaded analysis paralysis, and have so many second thoughts?

Case-in-point: Can you believe this guy willingly decided to go be swallowed whole by a giant anaconda? Talk about not letting an abundance of information, or fear and indecision get the better of you! I don’t even know what to say about that!

The reality, though, is that most of us are better at using incomplete or imperfect information in our lives than we are in our trading. And while it’s probably because money and reputation are on the line, analysis paralysis, indecision, and missed trades creep in as a result.

That’ exactly what we’re trying to prevent here, and the hope is that by identifying some of the more seamless decisions we make in our lives every day, we can then carry over that same clear thinking to our trading for more clarity, better execution, and improved results.

There’s No Room for Analysis Paralysis on the Road

No Room for Analysis Paralysis on the RoadDriving is an everyday task for the vast majority, and something that feels like second nature to us by now. More than the physical aspects of steering the vehicle and managing its speed, however, driving is about perceiving and processing information, making decisions, and reacting. And, like in the markets, there’s no room for analysis paralysis while driving!

Instead, we make decisions very quickly, and using only the information we have readily available at that very moment. Sounds a lot like trading, doesn’t it?

What we don’t do is sit there in traffic, indefinitely weighing all the options and pondering our next move, because we literally get nowhere fast while sitting idle and drowning in information.

See also: Trading Rules No Disciplined Trader Will Break

That kind of analysis paralysis can happen quite easily in the markets, though, and overcoming it doesn’t mean simply throwing risk out the window and “just going with it.” However, it does mean that if you’ve first been mindful of risk, and all the conditions you look for are in favor of your decision, then you act according to your plan, whether that means turning left onto the highway or going long in the markets.

Somehow that seems easier when driving and more difficult when trading, but the same calm, focus, and decisiveness you exhibit each day in the car is exactly what you need to bring to the markets. Try thinking of that while you trade and see whether trade decisions become easier and analysis paralysis becomes less of a threat.

The Psychology of Imperfect Information

Psychology of Analysis ParalysisI studied the following lesson in a psychology class years ago. That was before I even became a trader, but now when I think about it, I see how it applies so well to the markets, too. Yet another way trading imitates life, I suppose!

Anyway, we face situations like this one in our lives all the time, both literally and figuratively, and it really represents trading in a nut shell: Inevitably, we come to a point where we can’t see the road ahead. So, what do we do?

Well, this is one of those times when we face imperfect information, yet we always manage to proceed in spite of it. When literally facing this exact situation, we have no way of knowing at the time if the road continues around that corner, if it ends altogether, or if hidden obstacles are looming just out of sight. However, we more than likely do not let the lack of information stop us in our tracks.

In the markets, though, sometimes we do let it stop us, and that’s why we go off in search of additional information, often to the point of analysis paralysis and self-sabotage.

That’s the cycle of thinking we’re trying to break, and the above lesson is very real proof that we can. Afterall, it is in our very nature as humans to carry on in spite of limited or imperfect information.

In the markets, that means trusting our strategy and the validity of the set-up to continue in pursuit of the desired result, which is obviously a successful trade. It’s only when we choose to fight our strategy, and in essence, go against our very nature, that we tend to run into problems with analysis paralysis. And in that case, it’s our choice, not our natural predisposition, to go out unnecessarily in search of more information.

Conclusion

We are all living and trading in an information age, but quite ironically, too much information, or analysis paralysis, is a very real concern. It causes confusion, can lead to disastrous losing trades, and makes proper trade execution almost impossible.

The good news is that humans, by nature, don’t require complete or perfect information in order to make decisions, and what we’ve done here is take a closer look at some everyday situations where we actually excel in spite of it.

Definitely give this some thought next time you have valid trade signals, but still feel like heading out in search of additional confirmation, adding indicators to your chart, or second guessing what’s already there!

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Robert Colville

The Lazy Trader is a fund level Forex Trader who trades for no more than ten minutes a day. If you want to learn to trade successfully in his set-and-forget style, have a look at his online trading course

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Robert Colville

The Lazy Trader is a fund level Forex Trader who trades for no more than ten minutes a day. If you want to learn to trade successfully in his set-and-forget style, have a look at his online trading course

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