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Knowing too Much

It sounds crazy, but you can know too much about anything you want to trade. 

This is hard for people to accept in our "Knowledge Is Power" society… where the Internet puts thousands of pages of information, data, and news in front of us with a few clicks of a mouse.

People like to believe that with enough information, they can make a perfect decision… That by adding fact after fact, data point upon data point, their understanding becomes increasingly clear. But it doesn't always work like that.

In the field of behavioral finance – essentially the study of how people make decisions surrounding money – studies have repeatedly shown that humans usually gather too much information… and sometimes get stuck in the process.

Picking a stock, bond, fund, currency, or futures isn't an exact science. Often, it means letting some facts and data go…

Don't misunderstand… I'm not saying you should dive into a trade half-cocked, throwing money at every hunch and tip that comes along. You do need to understand the markets you trade.

But don't spend so much time collecting data that you fall into the trap of knowing too much, and then forgetting to take action…

People can easily be paralyzed with indecision. At a certain point, traders can get lost in a sea of indicators, ratios, and statistics that don't add to their understanding of the investment.

For example, say you find something that looks expensive based on the past 12 months of data, but it looks like a steal based where it sits on a daily or weekly chart. What are we actually seeing? What does relative position on a chart actually tell us?What if what we are seeing on the chart versus other data we may have are giving us conflicting signals? Which is most important? What can we ignore?

Don't get bogged down in too much data, especially historical data. When you want to buy or sell something, don't forget to add in your experience. Then combine experience with what you see together with other data you may have to give you some expectations (probabilities) about the future.

Avoid anchoring your current decision to a past decision. For example, cut your losses early if the trade isn't going your way… Don't stick with it just because you took a position.


Comments 1

Guest - E on Friday, 06 March 2020 06:53


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Monday, 27 May 2024

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.