Paralysis of Analysis

I have been asked several times lately by new traders how to overcome the fear of placing trades. Just today, I received an email from someone saying that they had alerts set for $JOEZ, $SCEI, and $KERX, saw the setup, but couldn’t quite pull the trigger. The setup worked just as they planned, yet they missed the trade. I never had this problem. In fact, as I have said before, I had quite the opposite problem! However, having talked to a lot of traders, I do know a little bit about this topic. So per the email that I received today, I decided to write this blog and discuss a little thing known as ‘paralysis of analysis’.

The term “paralysis of analysis” refers to over-analyzing (or over-thinking) a situation, so that a decision or action is never taken, thus paralyzing the outcome. Paralysis of analysis occurs in all parts of life, not just trading. Perhaps you have a great idea for a new social media site, but you don’t know how to go about getting started. You don’t know how to get the patent, or how to recruit investors for your idea, or whatever. So you are stuck, basically paralyzed and at a standstill. You will never be succesfull and never fulfill your dreams if you don’t figure out how to overcome this fear. Being paralyzed is great for new traders because you want to take the time to learn before placing trades. You cannot blindly follow a trader and expect to make money. You have to know the concept behind the trades and understand why the trade is being placed if you want to be truly successful. However, once you have taken this time to learn then how to do you muster up the courage to actually push the “buy” button and put your plan into action? Well…..

The first thing that you must remember as you start to overcome this fear is that there is no perfect way to approach trading. Each individual must find an approach that is perfect for themselves. There is no perfect strategy that will always work in the stock market. ‘Always’ doesn’t exist. Learning to treat trading as an art form rather than an exact science is how you learn to be successful. You enter stocks that have the highest probability setups, and you exit stocks when those setups don’t work, with your capital still intact. This is the key to success in trading.

The way that we teach you to overcome this paralysis or analysis at Bulls is by following the 4 steps below:

1. Master high probability setups and know how they should act

If you are trying to read every book out there and use every indicator that has ever been placed on a chart, then you are without a doubt over analyzing this business and just going to run into a wall of confusion. Start by learning 1 or 2 setups and figure out what they are supposed to look like and how they are supposed to act. Start out just trading this setup, then slowly add in another and another until you have a complete arsenal.

2. Start by taking small positions in the trades

Trade the stock as if it were a normal position size. This will help you get your feet wet and get more comfortable with placing actual trades.

3. Have a game plan for the stocks you enter

Know what type of trade it is that you are entering and what you expect out of the stock. If the trade doesn’t go as planned, then sell the stock and move on. There are always other trades just around the corner. Cutting losses quickly on setups that go against you can be your greatest friend.

4. Keep a trade journal

Review your trade journal at night. Discus everything in the journal: why you want to enter the trade, your target prices, what that market is doing, what the sector of the stock is doing, your risk reward in the trade, etc. Below, I included an example of one of my trade journal entries. This will really help you to understand your trades and become a better trader.

Don’t be scared to trade. As in many things in life, the real work is done in preparation for the battle. The battle simply mimics what you did the months before in preparation. Remember, “Luck is what happens when preparation meets opportunity.” Once you have put in the amount of time to learn what you are doing then don’t fear going for it. you just might get “lucky”… Hope this helps!

Email me if you’re interested in trying out the Bulls Bootcamp!

9 thoughts on “Paralysis of Analysis”

  1. Thanks for this post Maribeth! This is a problem I’m having right now – I also had my finger on the buy button for KERX today at $4.23 and before I bought, I went back to my risk analysis spreadsheet and calculated an exact position size and entry price and by the time I looked back at the chart, the stock was already at $4.35 and rising. Then, after it spiked up to $4.57, I again looked at it on the pullback to $4.30 for an entry off the bounce of the 20sma, but had to go back and calculate my risk/reward and position size with the new price. Again, once I looked back at the screen I had missed the trade again.

    Do you have any advice on how to quickly calculate position sizes or how to know when it is safe to re-enter on a bounce with a play like KERX? Even if I had entered at $4.33 like I planned, I would have made a killing on KERX today, but I remembered Kunal telling me a while ago never to enter more than 1% above your intended buy price, so I decided it wasn’t worth chasing.

    Also, what are your favorite high-probability setups and which ones would you recommend as the “easiest” to play for new traders?

    • @ckz8780, for calculating position size on the fly, why not use the target sell price as your guide for position size when you’re planning the trade ahead of time. If you’re expecting a 10% return, you’ll be undersized by about 10%, but that’s ok. If you happen to chase it a bit, you won’t need to recalculate. Kunal has said that over time you develop muscle memory for position size.

      • What do you mean by using the “target sell price?” I’m not sure how that would help me calculate position size. Currently what I do is I set an amount of my total portfolio that I’m willing to lose on any one trade (currently that’s 1.5%). If I have a 10K portfolio that means I am willing to lose $150 on any given trade. I then pick an accepted stop percentage (always under 5%) and divide $150 by it which gives me (assuming a 5% stop loss) a max position size of $3000 to stay under losing $150 if I lose the full 5%. Then inputting a share price to determine how many shares I can buy for $3000, and where my stop should be (5% off my buy price) is easy. Of course I have a spreadsheet I made to do this all for me so all I do is quickly put in the stop %, and share price, but that still takes a few seconds. I am starting to see however that like you said, as you trade more and more you start to develop a feeling for how big your positions can be and you can start to quickly estimate. that’s what I was looking for, and I’m starting to get it now! 🙂

        • @ckz8780 – I’m new to the BOWS style of trading, so I’m not sure it this would conflict with their principles in any way… but imo, part of your difficulty may stem from using a numerical hard stop (“5%”) vs. one that is chart/technically based. Your use of a max. loss/trade based on a percentage of your portfolio is reasonable… but using an “arbitrary” stop level (i.e., it has no relation to actual support/resistance levels, and therefore no significance relative to the stock’s price action or other traders) seems questionable. I would suggest trying to establish a stop level in relation to (i.e., just below) support/resistance levels as indicated by the chart (e.g., highs/lows, daily MAs, Bollinger bands, fibs, etc.), and comparing that to potential targets (also chart-based, and that are reasonable achievable within your chosen timeframe/holding period), and then assess what the resultant risk: reward ratios are. Most traders seek a risk:reward of 1:3 or better. Shorter timeframes and setup probabilities may allow for a slight “worse” ratio of 1:2… and scalpers may even consider a 1:1 ratio as being acceptable if they know they will win a lot more often than they lose. Assuming your stops & targets are reasonable and the risk:reward is acceptable, then you can size your position relative to the $150 max. loss per trade that you established. For example, if the stop determined is $0.10 below your entry, then your position size should be $150/$0.10 = 1,500 shares. As far as doing this all quickly… the last calc is fairly easy/quick even in your head, and as for targets/risk:reward, you can even kinda “eyeball” it visually on the chart by comparing the vertical (price) distance from entry to stop vs. the distance to the target level(s). (For example, if your stop is about $0.10, then you can eyeball that your targets need to be about $0.30 above your entry to provide a 1:3 risk:reward. Being so precise re: calculating exact levels is nice, but comes at the sacrifice of speed, which is probably more critical. And again, the stock/price action doesn’t “care” about your precise numbers, and probably neither will you once you’re in the trade — your decisions will probably be guided by now the stock is acting as much as whether it respects precise, calculated levels that basically only have meaning to you personally.

          • Re: stop levels: Of course possible stop location also includes the primary support/resistance levels for the setup pattern itself — e.g., just below the consolidation, etc. — and also depends on how aggressive/conservative your entry is relative to the pattern.

  2. Besides looking at chart patterns when trading the psychological aspect plays a big part as well, hence I recommend reading “Trading in the Zone” by Mark Douglas. It definitely helped me pull the trigger after reading the book.

  3. thanks a lot, @maribeth
    i do write down my trading plan but never so detailed, and this is probably one of the reasons why i end up overthinking every trade and then chicken out or just plain miss them. i also like the idea of taking smaller positions to begin with, makes a lot of sense.
    btw, i’d just bought “trading in the zone”, so here’s to good timing! thanks for the tip, @tugofwar

  4. I used to have this problem until I got position size under control. With a manageable position it feels great as you do not get stressed and already know how much you are going to lose. If you stick to your stops you really can’t go wrong. Best book I have ever read is Daily Trading Coach, 101 lessons by Brett Steenbarger. Its pure gold!

  5. When ever i am scared to pull the trigger on stocks, i go back and look at the options on it if there are any and that really helped me in lot of cases. Less upfront capital but more reward in terms of %…


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