Are you stuck in this trading dead end?

Last weekend I visited a bike shop. I don’t mean the area at the back of Halfords, where you can buy bikes with shopping baskets on the front or helmets with Barbie on the side.

I mean the kind of bike shop that you need to take out a second mortgage before entering.

I’ll admit to feeling a little dizzy surrounded by all that high-tech-ery. And as I ran my fingers over monocoque carbon frames, eyed up the wind-tunnel-designed integrated seatposts and …

… I realized that I’d completely forgotten the conservative “wishlist” of features I’d entered the shop with – my mind had gone blank and I would be putty in the hands of the approaching salesman.

Luckily I was saved from myself by a tug on my sleeve from my son to announce that he needed a toilet-break.

I’m sure Chris Hoy never let such things get between himself and his bike.

Spoilt for choice

Human beings are, on the whole, pretty useless when given too much choice. As cavemen, we may have been capable of hunting down a buffalo on a barren plain, but stick us in the middle of a supermarket and we have a nasty habit of gorging ourselves on the most unhealthy options.

And we can be just as useless when we give ourselves too many trading options …

I’ve been playing around with candlestick theory lately.

Candlesticks are great market-reading tools, but they have their drawbacks …

Personally, I’ll find a great set-up on the 2-minute candlestick chart. I’ll just look at the 10-minute chart to confirm it … then the 60-minute chart … and by the time I’ve made up my mind – I’ve missed the trade.

In my opinion, too much technical analysis is just as dangerous as too little. In fact, it’s possibly more dangerous, as the overly technical trader is often too cocky and sure of himself.

The two likely outcomes from over-analysing your trades are:

– making a rash trading decision that over-stretches you financially (like I almost did in the bike shop)

– or getting stuck in the dead end of “analysis paralysis” (which is where my candlestick trading sometimes leads me).

Dead-end decisions

Both of these outcomes stem from an inability to make a rational decision.

In all aspects of life, over-thinking can lead us into dead ends.

It’s that constant need to ask the question: “But what about ….”

It’s what we see big institutions doing again and again when trying to implement new policies – someone raises the “What about X?” question, and a new layer of consultation is needed …

It’s what the safety-conscious officials do when they investigate the safety of hanging baskets, or playing conkers.

And it’s exactly what I’m doing when I want to just double-check the 15-minute chart … and the 20-minute chart …

Embracing the uncertain

Luckily, there is a solution to our problem, and it can be summed up in three sentences …

– Be prompt and decisive with your trading decisions.

– Keep your risk small.

– Remember: sometimes you will get it wrong.

As long as your risk is controlled and your funds are properly managed, it won’t matter than we get it wrong sometimes. Let’s face it – if we spend hours pouring over charts before any trade, we’ll still get it wrong sometimes (and we’ll miss out on some great trading opportunities in the meantime).

Uncertainty is as much a part of trading as it is every other area of our lives. And, just as uncertainty brings us losing trades, it also brings us winners.

The most important trading story of 2010

A great way to fight off “decision demons” is to adopt a prescriptive trading strategy – i.e. a strategy that has very clear trading rules by which you enter and exit your trades.

There are plenty of these on the market, and in Trader’s Bulletin Weekly, I try to give you my views on the products I’ve tested.

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How to make the right trading decisions What’s the difference between trading and Christmas shopping?