Is Analysis Paralysis Killing Your Trading Performance?

Many traders, me included, love analysis. In fact, I prefer it to trading in a way. I am a technical trader, and for me it's fun to go through chart after chart, different sectors and refine my analysis narrowing it down to a small number of favorite trade set ups.

For the fundamental traders among you the vast information available on the net to feed your thirst for more information is literally endless.

The dividing line between useful and necessary analysis and over analysis is a very fine one. Whether you are a technical trader, a fundamental trader, or a combination of the two we are all susceptible to over analysis, at certain times. Our lust for analysis cannot just be explained by the sheer amount of information available to us. After all we have a choice: We can say: "enough is enough".

You probably know as well as I do how this incessant search for information paralyses your decision making processes. The good moves which are missed because you weren't quick enough to get on your signal because you were otherwise engaged, even when you "knew" that the move was imminent leads to much frustration and self rapprochement.

We can easily justify the need to over analyze, particularly in the present economic climate. We are at the beginning of a major transition from one major cycle to another. Private investors are nervous, the markets are climbing a wall of worry, and you are probably still analyzing it all...

So, what is really going on here?

Why do we feel the need to over analyse our analysis? Could it be that the habit is hiding a major psychological glitch?

In essence, the need for information and confirmation fulfills a major need which resides in all of us. This need is also a primal human desire. Namely, we need certainty. Particularly at times when we feel the wind of change blowing around us this need for certainty becomes an overriding desire making us prone to doing all those things we know will not serve us as investors and traders.

The trouble with your need to play safe masques a deep fear that goes right to the core of your very existence. Uncertainty makes you fear for your life. You cannot know the outcome of an event that has not yet happened. Therefore, all the analysis in the world will not guarantee that you are on the right side of a trade. Your over analysis serves as a mental safety net that cocoons you in the illusion that you can predict with a higher degree of certainty the most likely outcome of an impending move in a stock.

I know that you don't want to hear this, but this idea is utter nonsense. There are only three things you can know for certain, when you put on a new trade, no matter how much time you spend on your analysis:

You know your entry price, you know where your stop is and you know your position size.

Beyond that point you are in unknown territory. Deep down every trader and every investor knows this; even though we override this deep truth with the tools of our trade, the detailed research and analysis we do every day.

Please don't get me wrong: I am not asking you to abandon your research and analysis. It is a very useful tool and should be used. If you want to invest in, let's say MSFT, for the longer term, you will want to know that the company's fundamentals are sound. However, analysis is just that, a tool and not a means to an end. Instead, I am hoping to open your mind to the deeper workings of your mental and emotional processes which drive you to adopt behaviors that may not be in your best interests as a trader and investor.

If you can become aware of the fact that your need to spend hours upon hours on analysis is actually stopping you from making money, rather than contributing to your ability to make money you might look at  analysis in a new way.

You might want to ask yourself at which point your need for analysis becomes a distraction and begins to cover up other issues, like the fear of uncertainty and the need to be right.

Self awareness and self observation are essential tools we need to hone in order to become better traders and better investors.