Paralysis By Analysis In Forex Trading

This is a very common affliction, especially among technical traders. Paralysis by analysis can occur when traders have too many studies on their charts and seek endless confirmations before taking any action. This is the polar opposite of traders who initiate trades recklessly based on “gut feeling” alone. Paralysis by analysis may be the lesser of the two evils, but both of these afflictions can be extremely detrimental to forex traders.

There is a lot of good in being cautious and conservative when deciding to take trades, but becoming paralyzed by the decision-making process can be totally counterproductive. Having all of the latest and greatest indicators on your charts can be exciting, but will it really help you become a better trader? Maybe, but probably not.

A good remedy against paralysis by analysis is a combination of solid risk control and money management. Technical analysis is very helpful in setting risk management measures like a logically-placed stop loss that’s not too tight and not too loose, and a good reward-to-risk ratio. And money management is an absolute essential for any trader who wants to be successful. With these prudent measures in place, traders need not be paralyzed by the trade entry process. A trader will never come anywhere close to 100% correct, even with 50 indicators, oscillators, trendlines and squiggly lines pointing in the same direction at the same time. But that’s perfectly okay, as long as risk and money management are in good order.

This is not at all to say that traders should ever just jump into trades without first doing their proper analysis. As mentioned, that is an evil in and of itself. But there are many traders that are utterly unable to pull the buy/sell trigger unless all of the many stars in the galaxy are perfectly aligned. This almost never happens.

Stick to the essentials and only what works best for you over time. When a good opportunity presents itself according to your careful analysis, take it. But always have strict risk controls and money management guidelines in place.

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Comment by AnnaTanady

2009-07-01 21:32:26

i guess technical analysis is one choice we could consider in forex trading, it could be helpful if we could effectively use it to predict what will affect the currency based on the risks
by the way, this is a great post..
i’ll be waiting for your next post

Great Day!!

Anna Tanady

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