When trading futures, have you ever felt overloaded with data, news or indicators? With all the software, add-ons and platform based third party networks available today, ‘paralysis by analysis’ could potentially be an issue.
Futures Trading Overreactions Attributed to Paralysis by Analysis
Some examples of ‘off the cuff’ or knee-jerk trading ‘overreactions’ based on short term events that could potentially cause you to react from paralysis by analysis are:
- Tightening a stop order – By adjusting the price level of a futures contract’s stop order level to be closer to its current price, you will potentially exit or enter a trade before additional price movement occurs.
- Loosening a stop order – By adjusting the price level of a futures contract’s stop order level to be further from its current price, you will potentially exit or enter a trade after additional price movement occurs.
- Manually exiting a position prematurely – By manually exiting a position based on an influx of time related data without keeping an eye on the longer trend, you will potentially exit or enter a trade before additional, wanted price movement occurs.
- Manually entering a position based on reaction, not strategy – By manually entering a position based on an influx of time related data without keeping an eye on the longer trend, you will potentially enter or exit a trade after additional, unwanted price movement occurs (A stop order triggers a trade to be entered or exited when a price level is breached).
Simplify Your Futures Trading Strategies and Analysis
One potential solution to paralysis by analysis is to simplify your futures trading strategy or analysis process. Over time, many traders tend to collect and layer a number of day trading indicators on their charts which leads to unnecessary “visual” complications. The chart below of the S&P 500 futures contract (ES) is a good example of what this can look like!
Making sure your charts are clear and actionable is a great first step to focus your approach. By removing unnecessary indicators, you can simplify your chart and in turn your market analysis. Below, is another example of an S&P 500 (ES) futures chart following such a clean-up process:
Limit Exposure to Financial News While Trading
Reducing your exposure to news sources could also help improve focus by decreasing the opportunity for distraction or over-analysis. Similarly to the challenge presented by an overabundance of indicators on your charts, consuming too much news can also trigger similar overreactions that may negatively impact your trading.