How to Avoid Analysis Paralysis in Trading


A common challenge impacting most traders and investors is the tendency to develop analysis paralysis – also known as trading paralysis. This is because there are a number of conflicting thoughts and emotions that can affect a traders ability to pull the trigger on a buy or sell order.

Perhaps you’ve had a run of consecutive losses to your live account, and have simply lost all faith in your trading system. One tendency is look for a different system. That may not necessarily be the answer to your problem.

Maybe you have too many indicators on your trading screen. Indicators and confirming signals are great – to a point. However, at some point waiting for too much confirmation on trades leads to lower profit potential (or lower risk to reward).

Assuming you have a profitable trading system, developing trading paralysis will always negatively affect your returns. It could be argued that trading less can be a good thing for some traders. However, over-analyzing open trades is more likely to be detrimental to your account.

Analysis paralysis, or trading paralysis, doesn’t only affect traders on entry signals. It can also affect investors and day traders by preventing them from exiting, or not exiting, positions when they should.

By over-analyzing the market, you can inhibit your ability to take action when a good trade presents itself. The result is missed opportunities. You can’t profit in trading without taking risks – nothing ventured, nothing gained.

Below are some things you can do, or not do, to help you take better trades based on objective analysis:

Don't let your emotions get the best of you.

Never become Emotional about Investing or Trading

Trading is very psychological in nature. It’s easy let your emotions get the best of you. This can be problematic for many traders, however, as overly positive or negative feelings can cloud your judgment and force you to make bad decisions.

Fear is what keeps traders from pulling the trigger, and it causes them to over-analyze trades as a result of not wanting to lose any (or any more) money. This is often the result of losing several trades in a row.

Fear is what causes trading paralysis, but fear is not, by far, the only emotion that effects traders. Below are some other emotions that can affect your trading:

  • Greed can cause you to hold on to trades too long, often turning winning trades into losing ones. Greed can also cause you to overtrade or overleverage your account.
  • Overconfidence also leads to overtrading or overleveraging your account. This is more likely to occur after a string of several wins.
  • Anger often occurs after a losing trade. It can cause you to re-enter the market on baseless trades, or overleverage subsequent trades, in an effort to “get your money back.”

That’s just naming a few emotions that traders must deal with. Unchecked, these emotions will influence your thought process and opinions about possible trading opportunities or exit points. The best traders have great psychological and emotional discipline to match their trading plan and money management skills.

Avoid watching financial news excessively.

Avoid Watching Financial News Excessively

A common tactic for many traders and investors is to watch the financial news for several hours a day. While there is nothing inherently wrong with this, too much information can create confusion.

One thing to keep in mind is that most of the pundits that you see on financial news shows don’t trade themselves. Of course there are some exceptions, but even they are just speculating.

My point is that nobody has a crystal ball when it comes to the markets. At least, no retail trader has a crystal ball.

Fundamental analysis is fine, but technical analysis of price is the most effective way to trade any market. Don’t let the opinion of someone, who probably doesn’t even trade, affect what you see on the screen.

Just like over crowding your charts with too many indicators can cause conflicting signals, watching too much financial news can keep you from executing timely and profitable trades. At some point, with so much information to process, you are bound to get conflicting signals – not unlike a bad first date.

Trust your Trading Plan

Trust Your System

Another problem that leads to analysis paralysis is not having trust in your trading system. It is important to trust your trading system, and the best way to build real trust in a trading system is to demo trade the system until you are consistently profitable with it.

Assuming you are using a profitable trading system, building trust in your system will greatly reduce the chances of experiencing trading paralysis.

Keeping a trading journal really helps to build trust in your trading system as well. Journaling also helps in picking better trades, and improves your overall performance over time.

A trading journal helps to build trust in your trading system, because it allows you to objectively track which trades, from which setups, and which time frames, etc… worked out best for you.

If a certain trading method, time frame, etc… is not working out for you, your journal can reveal that fact to you objectively. The numbers don’t lie – unless they are government numbers. CPI anyone?

Once you’ve found a trading system that works for you, you must drill its rules into your memory, so you can execute your trade setups instinctively.

Demo trading and journaling can help build trust in your trading system, which also reduces the chances of analysis paralysis.

Refresh this page if you cannot see the video!

Control and Cover Your Losses

Having excellent control over your risk, or money management, is one of the best ways to combat trading paralysis. Setting stop losses, controlling your exposure per trade, and covering your expenses are all vital aspects of proper money management.

You should always set a stop loss, preferably before you enter the market. Trading without stops can be disastrous. Just ask the guy in the video to on the right. Ouch!

You are less likely to experience a fear of pulling the trigger if you are risking a small fixed percentage of your account per trade. Most experts recommend risking 1% or less per trade.

Another way to lower the stress of trading, and therefore lower the odds of trading paralysis, is to use money management techniques to cover your trading expenses as quickly as possible.

Example: You enter a trade risking 1%. Assuming the trade moves in your favor, and you are up by at least 1%, exiting half of your trade would cover the expense of your risk on that trade.

At that point, you would no longer have any risk to your trading capital – only risk to potential profit. In other words, the worst you could do is break even.

Similarly moving your stop loss to break, when it is appropriate, helps to cover trading expenses. If your average trades are big wins and small losses, you are much less likely to be frozen by trading paralysis.

Lower your leverage to lower your stress.

Lower Your Leverage

Lowering your trade size is one of the easiest ways to lower emotional stress in trading. I spoke earlier of using a low fixed percentage per trade (preferably 1% or less).

Most novice traders, however, do not utilize low leverage. In fact, they usually overleverage and overtrade their accounts down to nothing.

With lower leverage, you are naturally less emotionally involved in a trade, because you have less at risk. Less risk always means lower stress.

If you are trading 3%, 2%, or even 1%, and your losses are making you a little gun-shy, you might find your trading is much more enjoyable and profitable when you lower your leverage.

Increasing the trade size, or leverage, has the opposite effect. Stress levels are bound to rise with increased leverage, which can bring on the tendency to over-analyze trades. All this makes it that much harder to pull the trigger on profitable trades, and opportunities are missed.

Clearly, trading paralysis is an issue that can affect any trader or investor. If the emotions that lead to this condition are left unchecked, you may soon find yourself taking, or not taking, trades based on them.

Trading is a highly emotional and psychological performance activity. The best traders learn how to control their emotions, so that their performances are not affected. Controlling the fear associated with trading paralysis, or analysis paralysis, is just another part of improving your overall performance in trading.

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