Trading Psychology I

Avoid Analysis Paralysis

Most traders start out soaking up information.  This information will come in the form of stock picks, books, seminars, trading coaches, gurus, you name it.  Your personal beliefs, background and personality traits will then take that information and digest it into what I call your foundation for trading.

Next you will take this newly found information into the world of the market.  This can be exciting and a bit scary at the same time. If you are lucky you will put on a few trades and things will go smoothly.  The money will just flow.  If you are unlucky, you will quickly realize why 90%+ of traders fail within the first few years of taking up the charge.

No matter how you start out you inevitably will face a loss that will hit you in the gut.  This loss will resemble the first time a girl broke your hear, or the disbelief you had when you heard at school that Santa didn't exist after your parents have been helping you draft your Christmas wish list and leaving out cookies for years. You will feel a sense of utter disparity as your trading world unravels much quicker than the time you have spent to build it up.

This is the phase where most traders will spend their entire careers.  In any business analysis of the company’s performance to drive further growth is paramount.  Trading is no different.  The only problem is you have to decipher when it’s time to tweak your model versus when results are just noise from the market.

Think about it, if you have just spent hours, weeks or months researching a strategy. This strategy on all fronts looks like it will give you an edge over the market let’s say 60% of the time.  In addition to this edge, it also provides you 2-to-1 in terms of the size of winners and losers.  By all accounts this would be considered a strategy worth testing in the real world.

Of course since the market is random, let’s say out of your first 6 trades only 1 works.  The experienced trader will know that it’s a matter of placing a large enough sample set of trades for things to net out.  The novice trader or the trader stuck in the analysis paralysis phase will without a doubt, change this strategy before it has time to prove whether it is viable or not.

As I’m writing this, it sounds so obvious that you have to allow time and opportunity to work in your favor.  But when it’s your hard earned money on the line your first reaction is to analyze and correct.  It’s such a normal human reaction to protect oneself.  Yet this type of behavior is what traps us as traders and never allows us to reach our full potential.

Do not get stuck in analysis paralysis!  Give yourself enough time in the simulator to fully develop your strategy so that  when you bring it to market, you have absolute trust and confidence in it.  Then, as the market goes through it's cycles, you will just simply adapt and not trash your strategy and start following whoever is posting winning trades.