Analysis Paralysis

[thetradingdoctor 10]

ANALYSIS PARALYSIS

 

 

The ability to simplify means to eliminate the unnecessary so that the necessary may speak…Hans Hofmann, Introduction to the Bootstrap, 1993

 

Emails from traders and investors of every ilk come to me on a daily basis. I am grateful, and urge you to keep them coming, as you inspire me, challenge me and force me to think. Everyone has a different way of being in the world and...as a logical corollary...in the markets. I get charts, graphs, opinions, links to articles, and more opinions. So much lately has been what the Fed will or will not do and how it will affect the precious metals and the dollar. I work hard every day to prevent my head from spinning, keep it attached firmly to the neck area and to attempt to filter out the signal:noise ratio."

 

Did I mention that people send me charts? They range from the utterly and overly simplistic to something which might be considered a Rorschach test gone very badly. I respect those who can trade from intensely complicated (to me anyway), charts which contain 10 or more different technical indicators plus at least three colors. If that is what works for your particular brain structure, then that is what works. Over many years of trading and experimenting with more systems and indicators that I care to recall, I have come to the conclusion that, in trading, less is more. For my own purposes I like to see price, volume, a couple of moving averages and then draw trend lines. For me, the simpler the better. It helps me block out so much noise, obviates conflict when indicators are not in synch or are giving different messages, and allows me to be definitive in what I do.

 

Simplicity is the ultimate sophistication…Leonardo DaVinci

 

Trader Alex (name changed to protect the innocent) sent me a batch of charts the other day. The charts were in several different time frames, and were loaded with indicators to the point where I was barely able to make out what Alex wished to trade. Worse than that, I could not figure out HOW Alex was trading. In this situation, one does the logical thing. One asks Alex. The response I got was quite revealing and, perhaps you can find a trading lesson here. Alex told me that he lived his life by making flow diagrams. Everything he did or planned to do, he diagrammed out beforehand in order for him to "be prepared" for any eventuality. For example, if he was invited to a party, he would do the following: starting a week before, he would map out (on paper) everything he had to do to prepare for the party, including selection of clothing, washing his car, telling selected people where he would be during those hours, finding out who would be at the party and how they would be dressed, how they would be arriving, how they would be mentally (good or bad moods), what they would be bringing to the host and hostess and so on and so on. Sometimes, he would wake up in the middle of the night to expand the flow diagram as new thoughts and possibilities crossed his mind. A day or two before the party, Alex began to be infused with doubt. Had he thought of everything? What could happen that he had not anticipated? Would be go into a state of social paresis if someone was at the party whom he had not expected or if someone said something to him for which he did not have an answer? If you think this sounds a bit whacko, you are likely correct.

 

Nonetheless, to Alex, this was his modus operandi, beginning from early childhood when he felt that his life was careening out of control after the divorce of his parents. He took almost complete responsibility for the divorce and vowed from that day forward that he was going to do everything possible to ensure that he did not make the same mistake again. Alex's response to what he perceived to be HIS problem (the bitter divorce of his parents) was to develop OCD (Obsessive-Compulsive Disorder). The manifestation of this was the development of increasingly complex flow charts and diagrams which he believed would allow him to control every aspect of his life through prediction. Now...take this one step further. Alex enters the financial markets and attempts to trade. Before he is able to place a trade, he makes the equivalent of a life pattern flow diagram. He adds technical indicators, one after the other and intersperses them with every possible news development or economic report that could or will impact the trading on any particular day. Alex is ready, so he thinks. Alex is prepared, so he thinks. Armed with a total overload of information and unable to sort out what is real and what is not, Alex is set to trade. Why is he writing to me? Because he is totally unable to execute. Alex suffers from trading paralysis. He has done all of this work, yet he feels that something is wrong. It is not the right time to make the trade, more news will come out which will affect the trade, he decides to wait for a "better entry," he thinks maybe he should do an option spread just in case. Every conceivable excuse is put forward by Alex for not trading: It's the wrong time. There is too much risk. Maybe if I just wait a little bit. Something just doesn't look right.

 

Alex will not get through this situation easily, as it is a modus vivendi for him which is transferring to every aspect of his life, including trading. What can you do ? Learn from this. To risk means taking chances in the face of uncertainty. We cannot control what the markets will or will not do. We cannot map everything out on a neat flow diagram, expect things to go our way and then panic when they do not. The best traders are flexible, adaptable, embrace uncertainty and get out quickly when they are wrong. The best traders do not make excuses and do not blame others. The best traders do not get themselves into states of analysis paralysis. They keep it simple and remain fluid.

 

Everything should be made as simple as possible, but not simpler…Albert Einstein

 

Until Next Time,

Good Trading and Brain On!

Janice Dorn, M.D., Ph.D.

www.thetradingdoctor.com

 

Copyright ©2007 Janice Dorn, M.D., Ph.D. – Ocean Ivory LLC

Edited April 20, 2009 by Soultrader