How to make the right trading decisions

I like to feel that I’ve got choices.

I quite like that there’s a range of about 20 different types of coffee to choose from in the local café (even if I always go for the same old white Americano).

I don’t even mind that the petrol station tries to lure me with high-octane Ultimate, Supreme, Momentum or (my favourite) Excellium (what does “excellium” mean!?)

So, if I like all this choice – why am I so useless at choosing?

Spoilt for choice

Some years ago, Columbia University ran an experiment, in which shoppers were presented with different types of jam in the supermarket. Some shoppers saw six different jams; others were shown 30. Out of the shoppers who where shown six types, 30 per cent went on to buy jam. Of the shoppers who had 30 options, only three per cent went on to buy.

Human beings are, on the whole, pretty useless when given too much choice. And we can be just as useless when we give ourselves too many trading options …

I’ve spent a lot of time playing around with candlestick theory.

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

Personally, I’ll find a great set-up on the 5-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 filling your tank with “Extremity Maximus Unleaded 2000”)

– 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 and governments 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 that 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.

Related posts:

Are you stuck in this trading dead end? What’s the difference between trading and Christmas shopping?