Avoid Paralysis by Analysis

Avoid Paralysis by Analysis
April 20, 2020 Market Traders Institute

To KISS or not to KISS?

No crystal ball is available for purchase that tells you exactly what the markets will do the next minute, let alone the next day or week.

There are literally hundreds of technical indicators developed by all manner of really smart and successful traders that identify profitable entry points….but none of these work all the time. Sometimes, these signals will get you into a trade at the worst possible time, or get you out after giving all your profits away.

Another issue with technical indicators is that they all use historical price action to predict possible future price movements. Given this fact, nobody, not even the most experienced and wealthy wizard of Wall Street, is right on every trade.  

This market reality makes it tempting to add additional indicators to a chart in an effort to be right more frequently by getting in a little closer to the bottoms and getting out a little closer to the tops.

Traders might also be tempted to look to financial channels to help explain big market movements or to listen to “talking heads” to help them predict future direction and magnitude.

The danger with adding these additional signals to your trading is that they might give conflicting information and cause more confusion than help. This confusion creates a sort of paralysis, preventing the trader from getting into the markets, because confused people do nothing.  

The best systems for most people are simple ones that can be easily interpreted. In the heat of battle, you don’t want to have to take time to “squint” and hope you understand what the conglomeration of signals might be telling you to do.  

Here is a daily chart of the EUR/USD showing an 8-period and 40-period exponential moving average. Even these two similar indicators can send conflicting signals creating confusion.

8-day EMA vs. 40-day EMA of the EUR/USD 1-day chart.

Using multiple indicators, watching news or turning to other financial channels to explain chart movement is often very helpful. But don’t let any of these things affect your trading too much or pull you from following your system.  Stay focused on your trade plan and trust it more the other information to prevent confusion or paralysis from too much analysis.

Get more from your charting platform with SmartTrader’s powerful tools and indicators. Try it today!

Summary
Avoid Paralysis by Analysis
Article Name
Avoid Paralysis by Analysis
Description
The danger with adding additional signals to your trading is that they could cause more confusion than help, creating a sort of paralysis by analysis.
Author
Publisher Name
Market Traders Institute
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