Article: Moving Beyond Analysis Paralysis

Many years ago, I heard a friend say that there are three kinds of people in the world:  those who "make it happen," those who "watch it happen," and those who say "what happened?"  I laughed because the comment aptly described much of my daily experience with people at that time.

I now realize that the above perspective seems to ring true in the trading arena as well.  When we carefully examine the behavior of traders, we find that traders may be classified primarily as participators ("make it happen"), spectators ("watch it happen"), or inquirers (say "what happened?").

For purposes of this discussion, we will ignore the last group.  The inquirers are people who want income derived from the markets, but don’t really have the time, aptitude, or interest for exploration of trading.  They are often surprised by market moves, believe that market participation is a dice roll, and are mostly clueless about money matters.  As one banker told me, they are people who naively search for investment vehicles with a high rate of return and low probability of loss, not grasping the fundamental truth that reward is proportional to risk.

Throughout my trading journey, most of the people I’ve encountered have been spectators.  At one end of the spectator continuum, there are those who cheer when the markets move in expected directions or when players (other traders) succeed in their endeavors. Reminds you of sports fans at a football game, doesn’t it?  At the other end of the spectator continuum, there are those who methodically study the markets and observe how trading may be accomplished successfully.  Comparatively, the latter individuals have a better chance of becoming full-fledged participators—those who have developed sufficient confidence and skill to trade successfully on a regular basis.

In speaking about spectators and participators, I’m not suggesting that a thick wall exists between the groups.  Learning how to trade often involves shifting back and forth between "spectator" and "participator."  However, a problem arises when we get stuck in the spectator role; we become so comfortable with analyzing charts and trade setups that we lose focus on the ultimate objective—learning how to trade for ourselves.

How do we become entrenched spectators?  I’m not exactly sure.  At times, I believe that analysis paralysis acts as a cover for fear. We’ve been burned on a few trades, and now find it difficult to come out of the hole.  So, we comfort ourselves with charts and trade discussion, hoping that things will change.  Another possible explanation is that we don’t see a clear road between theory and practice. Trading looks good on paper, especially when someone else does it, but making it work for ourselves seems like a very interesting, but distant dream.

From an instructional point of view, helping others to improve their trading skills is not an easy endeavor.  I say this as a professional adult educator who has trained adults in various fields of endeavor (athletics, music, health care, education) over the past 30 years.  Some of the difficulty rests in the fact that no two people do things exactly the same way.  Talk to a group of traders and you’ll discover that different personalities, thinking patterns, and experience levels shape the ways in which individuals learn and trade.

Additionally, some people who are attracted to trading exhibit adverse tendencies that I’ve seldom encountered among other people aspiring to learn a skill set.  For example, when I worked in a music store and taught adults how to play the organ, I offered guidelines for development and anticipated that my students would practice.  Those who practiced diligently eventually learned how to play.  Pretty simple.  With traders, however, common-sense guidelines can go out the window very easily.  At times, I’ve offered helpful suggestions for improvement only to discover that some traders stubbornly do what they have always done (engage in trading behavior that doesn’t make them money), or worse, they do the opposite of my suggestions.

I vividly remember a failed teaching experience with a woman who had a "contrary" personality.  If I suggested "A," she did "B."  If I said, "Try trading with the trend," she would trade countertrend.  It was obvious that her countertrend approach wasn’t making money for her.  But, oddly enough, the discrepancy between how she wanted to trade and what worked in the market didn’t seem to bother her.  She had somehow convinced herself that if she did more of the same (countertrend trading), she would be successful.  Eventually, I realized that I couldn’t work with her because she wasn’t ready to change what she was doing by trying new things.

Moving from spectator to participator means leaving the realm of imaginary trading, and entering the arena of reality.  It means allowing yourself the freedom to fail, while embracing an organized program of development.  Remember my music students?  They had many failures along the way, but these failures occurred within a supportive environment.  Those who accepted guidance, practiced diligently, and remained flexible were the ones who overcame their limitations.

In general, I believe that a three-pronged approach to learning makes the process of developing skills more systematic and helps one to stay on track toward advancement.  So, in your attempt to break the bonds of analysis paralysis, consider structuring your learning around three important questions:

1. What essential knowledge, values, and skills do I need to trade more effectively?  (Forget about learning hundreds of things.  Focus on learning a few things well right now.)

2. How are these things used in a real-time trading environment?  (Most of us know that "textbook" trades are just that—things out of a textbook.  Trading in real-time presents challenges not found in a book or even in a simulator.)

3. What concrete steps can I take to produce improved trading performance, based on new learning?  (Be honest with yourself.  If what you’re doing isn’t working, then fix it.)

The resources that you choose to answer these questions can be few or many.  Some traders pursue individual learning by reading books and articles, talking to other traders, searching the Internet for information, utilizing Ensign Software’s Play Back feature, or receiving assistance from a mentor.

To facilitate learning among traders in a group environment, I’ve opened a new online Ensign chat room organized around trading the Dow Mini futures contract (See "Dow Mini" in the room list.)  There, I attempt to help room members answer the three questions above by adopting relevant instructional procedures that are straightforward.  In the room, I EXPLAIN important aspects of trading, ILLUSTRATE trade execution in a real-time trading environment based upon concepts discussed, and assist you to APPLY new learning.  Of course, as with all Ensign chat rooms, nothing said or done in the room is to be construed as trading advice.  Each person trades at his or her own risk.

By the way, if you’re looking for a magic indicator, fabulous method, or "secrets" of effective trading, you won’t find them in our room. (If there were such things, would anyone be sharing them?)  Instead, you’ll get a no-bologna approach to skill development.  But be prepared.  Your biggest improvement as a trader may not emerge from having more information about charts, but in learning to use your existing experience in more constructive ways.

Article by Brad E. Stych, Ph.D.,  Copyright © 2005 by Brad E. Stych, Reprinted by Permission