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Analysis paralysis in trading is when one is overwhelmed by the abundance of information and analysis available, leading to difficulty in making a decision.
This Can Happen In A Restaurant
Maybe you are one of those who know exactly what you want to order in a restaurant.
No need to think about it. If that is the case, then you don’t have analysis paralysis.
But if you look around, you probably will see someone staring at the restaurant menu for excessive time.
What are they thinking?
Hmmm, Steak salad?
Or chicken alfredo?
I’m quite hungry today.
Will a salad even fill me up?
But if I get the pasta, that is too much carbs.
They say not to eat too much red meat.
Chicken has less fat.
Did I have my servings of vegetables today?
Maybe I should get the salad. But then what dressing should I choose?
And on and on.
You can almost see the wheels spin in their heads.
The Same Can Happen In Trading
Should I go long or short?
The moving averages indicate bullishness because I see they just made a golden cross. But should it have been the 50-day and 200-day cross?
I’m not sure if I should have used exponential moving averages instead.
But RSI shows overbought.
Does RSI overbought mean many people buy, so it’s good to buy?
Or does it mean too many people are buying, so it is time to sell?
And MACD indicates bearishness.
Maybe I should change the lookback period on this indicator.
I’ll use the PSAR indicator to break the tie.
Do people even use the parabolic SAR anymore?
In any case, it shows bearish. Hmm. So, two bearish indicators and one bullish crossover.
But I believe the moving averages have greater reliability.
In any case, I’ll give more weight to the RSI than the PSAR.
Maybe I should have used a different indicator to break the tie.
Let’s try the CCI. Better check the weekly and monthly charts as well.
Forty minutes later, after checking still more indicators and more timeframes, they have not decided to go long or short on this stock.
Traders experiencing analysis paralysis often find themselves indecisive and may struggle to execute trades or take necessary actions in the market.
This phenomenon typically occurs when a trader is exposed to a plethora of market data, technical indicators, news, and various analysis tools.
Instead of making timely and informed decisions, the trader becomes trapped in a cycle of overthinking and second-guessing, which can hinder their ability to act decisively.
I’m not saying it is bad to perform analysis.
You should.
But you should also understand that you will not get a 100% definitive answer in trading.
You are going to get conflicting signals from multiple indicators.
And you are going to get conflicting trends from different timeframes.
Otherwise, there would not be a two-sided market.
The very reason that we have both buyers and sellers is that there are no clear-cut answers. Half the people believe in buying the stock, and half believe in selling the stock.
Final Thoughts
In trading, you have to be able to make decisions despite a lack of complete information or conflicting information.
We hope you enjoyed this article on analysis paralysis in trading.
If you have any questions, please send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
