Paralysis by Analysis or Extinct by Instinct?

Paralysis by Analysis

Forex traders can gravitate towards one of two extremes, though most traders fall somewhere in between. One extreme is called “paralysis by analysis,” while the polar opposite extreme is called “extinct by instinct.” When a trader is faced with these two extremes, the wisest choice, as is often the case in life and the markets, is to take the middle path.

Paralysis by analysis is a very common affliction, especially among technical traders. It is the tendency to become obsessed with analyses, studies and indicators, to the point where the trader seeks endless confirmations before taking any action. There are many traders who are utterly unable to pull the trading trigger unless all of the many stars in the galaxy are perfectly aligned. But perfect star-alignment almost never happens. While there is a lot of good in being cautious and conservative when deciding to take trades, becoming paralyzed by the decision-making process can be completely counterproductive. Having all of the latest and greatest indicators on the chart all pointing in the same direction can be exciting, but does it really help one become a better trader? Maybe, but probably not.

Extinction by instinct, the polar opposite of paralysis by analysis, is characterized by arbitrary decision-making in one’s trading. The best example of this is the trader that initiates trades recklessly based on instinct, or “gut feel,” alone. Traders who have had some experience with the markets often become over-confident in their ability to “feel” and predict market movement. So they replace deliberate decision-making based on careful analysis with blind trading action based on feelings and emotions.

Paralysis by analysis can be considered over-analysis, while extinction by instinct can be considered under-analysis. While most prudent traders may consider paralysis by analysis to be the lesser of the two evils, both of these afflictions can be extremely detrimental to forex traders.

The best remedy for paralysis by analysis is a combination of solid risk control and money management. Technical analysis can be very helpful in setting risk management measures like logically-placed stop losses and other types of exits. And elements of prudent money management are absolutely essential for any trader who wants to be successful over the long run. With these safety measures in place, traders need not be paralyzed by the trade entry process. Traders should realize that they will never come anywhere close to being 100% correct, even with 101 indicators, oscillators, lines and squigglies pointing in the same direction at the same time. But that’s perfectly okay, as long as one’s risk and money management practices are in good order.

Unfortunately, the best remedy for extinction by instinct is probably an expensive loss or series of losses. Only through an event that truly inflicts substantial pain will an afflicted trader likely learn that instinct alone is probably not the optimal approach if one wishes to trade on a consistently profitable basis.

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