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Thinking too much. It’s truly a form of mental ‘poison’ that if left unchecked, can consume you and drastically alter your thinking, behavior and even your personality. Needless to say, this negative habit can have disastrous consequences in any area of life: work, personal (relationships), school and especially in trading.
As with most things, a skilled trader is at his or her best when they are “in the moment” and not thinking too far ahead about all the possible outcomes of a particular trade. Trading is not a game of “chess” like so many people seem to think. It is not going to improve your odds of success by thinking more, researching more or being at your charts more, if it were that easy everyone would be doing it.
Trading success comes when a person has the proper tools to analyze and make sense of the market as well as the proper mindset that allows them to stay “in the flow” and not think too much or analyze too much.
What is “overthinking” in trading and how does it affect your performance?
Overthinking can seem like a broad and somewhat obscure topic so it’s important to define what it is so that you know when or if you are doing it so that you can being taking action to stop it.
We all know that if someone is “overthinking”, they are thinking too much about a topic, to the point where it negatively impacts them. But, the following points outline some specific examples and causes of overthinking in trading. Read along and see if these sound familiar to you:
- Recency Bias on recent trade outcomes
In a recent article I wrote on recency bias in trading, I discussed how traders become overly-influenced by the outcomes of their most recent trades. Essentially, they end up overthinking them and assigning too much weight to those recent trades outcomes.
For example, if you’re guilty of having recency bias, it means you are thinking and feeling like “this trade” will be a winner “because the last one was” or that “this trade will be a loser because the last one was”. Either way, you’re wrong lol. Your last trade has basically ZERO to do with your next trade. Each trade’s outcome is essentially random from the previous trade(s), so stop thinking about it too much and becoming overly-influenced by the previous trade(s) result. Traders can even start thinking of things like “well since the last 3 trades lost, this one is bound to win” this is another example of recency bias in action. But, this too is wrong and has zero meaning in the real-world. Remember: Your current trade has NOTHING to do with your last trade!
- General fear of losing money and of being wrong (bruised ego syndrome)
Many traders think so much about “losing money” and “being wrong” that they end up not taking perfectly good trades. This problem typically stems from the trader risking too much money or more than they are comfortable with losing on any one trade.
If you’re going to be a trader, you’re going to be dealing with risk so you have to accept that you can lose and instead of trying to avoid it, just try to manage your losses by managing your risk properly. It comes to down to not risking more per trade than you are comfortable with losing, this is an amount that when you have it at risk you should be able to easily fall asleep at night without worrying about the money or feeling a need to “check the trade real quick”.
- Not trusting your trading strategy
When traders overthink, they often start to doubt their trading strategy and they start thinking likes like “maybe my strategy doesn’t work” or “maybe I should add some trading indicators” etc, this type of self-doubt and overthinking can be very damaging.
Not trusting your trading strategy is a result of overthinking and not “trusting the process”. Just because you hit a losing trade or even a few in a row, does not mean you should abandon your trading strategy and look for a new one.
- The “Deer in the headlights” concept: Analysis Paralysis
The deer in the headlights “syndrome” is something that happens when traders (once again) overthink about the market and their trades. What happens is that a trader starts to overthink about all the possible scenarios of a trade’s outcome and they end up missing the trade altogether. They end up just staring at the trade take off without them, like a deer caught in the headlights of an oncoming car. You have to be confident and decisive when executing your trades and you can’t allow yourself to get stuck in a cycle of “what ifs” / fear.
The hindsight “trap” is something that happens when a trader becomes obsessed with trades after they play out. They torture themselves about missing a trade (deer in headlights) or about exiting a trade too early or a whole host of other things. The bottom-line is that living your trading life in a hindsight “haze” of “what could have been” is detrimental to your long-term trading success. You need to realize that sometimes you’ll miss trades, sometimes you won’t exit a trade exactly when you want to etc. but don’t waste your time thinking about those things too much or you will drive yourself crazy.
- Trying to “outthink” the market: It’s not a chess game!
Many, many traders think they can “outsmart” or “outthink” the market by doing more research or learning the latest new trading system. However, this couldn’t be further from the truth. The market is going to do what it wants, regardless of how much time you spend reading economic reports or studying new trading methods. Unfortunately, trading is not a chess game that you can become better at simply by thinking long enough or hard enough about. Yes, you DO have to do some initial study and get some training to learn an effective trading method like price action analysis, but once you learn a method and you’ve got a weekly and daily trading routine down, any additional time to “researching” “analyzing” or “trying to figure out what will happen next” is futile.
- Short time-frame charts cause overthinking
One sure-fire way to get your brain cells in an overthinking “traffic jam” is to start looking at short time frame charts. The main reason I preach trading the higher timeframe charts is because it simplifies your analysis and smooths out all the noise and random price action on the short time frames. This noise and randomness causes you to overthink and overtrade and generally just sabotages your trading.
- Checking the news constantly
If you’ve been following me for any significant length of time, you know that I generally abhor trading the news because I feel the price action reflects all pertinent variables of a market and also because it causes traders to overthink and over-trade.
There are thousands of variables that can affect a market at any given moment, so truthfully, to try and analyze or “trade the news” is basically the same thing as trying to “out-think” the market or thinking that if you just “know more” you will “figure out the next move”. All that is true is that the price action is already showing you what the impact of any news on a market, so skip all the news B.S. and just learn to read the footprint of the market; the price action.
So, how can you stop overthinking and start trading?
So now that you know what overthinking is and how it negatively impacts your trading, here are some simple yet effective solutions on how to overcome this bad habit.
- Trade What You See, Not What You Think
Trade what you’re actually seeing, not just what you think might happen. Traders often think themselves right out of perfectly good trade setups because instead of simply trading what the setup they see in front of them, they start imagining a whole bunch of different scenarios that may or may not happen. You just have to accept that you never know how a trade will play out before it plays out, but when you see a setup that meets your trading strategy criteria, you simply execute the trade and walk away
As mentioned previously, the price action of a market, easily visible on any raw price chart, is the best and most accurate reflection of all the variables affecting a market at any given time. To focus on news or “fundamentals” is simply to distract yourself from the price action and it will set you on a course of overthinking and analyzing. Do yourself a huge favor and stop looking at trading news.
- Put together a trading plan
Perhaps the single most impactful thing you can do to stop overthinking and start trading, is to put together a comprehensive yet concise trading plan. Your trading plan is your “document”, your tangible piece of accountability and guidance. You will learn a lot simply by putting it together and it will become the “glue” that holds your trading together. You should refer back to it every day and read-through it so that you remember what you need to do to not only trade your strategy properly, but to stay on track mentally. Check out my article on how to build a trading plan, for more in-depth trading plan instruction I have a trading plan template in my professional trading course.
Your trading plan is what will set into motion your trading routine. Routines influences habit and positive habits turn into success.
- Understand what “gut feel” and trading intuition really is
Traders can get easily confused when they hear something like “Don’t think too much, just follow your gut…”So, I want to clarify that statement because gut feel and trading intuition are very important and necessary pieces of the pie.
The key with gut feel and trading intuition is that it doesn’t come instantly. It’s something that you develop and that will become stronger within you over time and with training and screen time. Essentially, I view it as a “subconscious piece of trading confluence” that adds weight to a trade. It’s your subconscious giving you a ‘green light’ or ‘red light’ to act based on everything you are seeing on the chart and your cumulative trading experience.
- Practice and implement “set and forget trading”
You may not like this, but you need to physically leave your computer sometimes, for longer periods of time than your probably used to. You have to do this so that you don’t overthink and overtrade and get yourself into trouble.
The hardest part of trading for most people is self-control. One of the most effective and efficient ways to establish self-control in your trading routine is to build-in a section in your trading plan that describes when you will be in front of the charts, for how long and when you will physically leave the charts. You need to remember that you will miss some trades, and that’s OK, the market will be there tomorrow. We are trying to execute a trading edge with discipline, not trade everything that moves.
- Eliminate fear by controlling what you can and letting go of what you can’t
Just like you cannot control another person without their being severe negative consequences in most cases, you absolutely cannot control the market. You can certainly try, but it will result in losing your money and trying to control the market is the best way to describe why most people lose at trading.
Literally, the ONLY thing you can control in the market is how much you risk per trade, your stop loss placement, your position size, your entry and your exit placement, and that is really about it. You have ZERO control over all the other market players and which way the market will move, Z-E-R-O. Yet, time and time again, traders behave in such a way that shows they are trying to control the market, whether they intend to or not.
The biggest way to eliminate fear in trading is to control your risk to a dollar amount you are mentally and emotionally OK with potentially losing on any given trade!
This is one is really just about self-discipline. You desperately need to stick with your trades once you enter them. Stop wondering “is there a better trade out there” and then you close out your current trade and enter another one. This is GAMBLING, NOT TRADING!
Remember, your trading edge (in order to be realized) needs to play out over a series of trades because you never know WHICH particular trade in a series will be a win or a loss; if you do things like close a trade out before it gets a chance to start moving, you are trying to play God of the market and that never works out. Note; there are times when you should close a trade out manually / early, but these are rare and it’s something you shouldn’t do until you’ve had enough experience, training and time.
Conclusion
To summarize, trading success all comes down to confidence, mental state of mind and trading skill. If you are stuck in a haze of overthinking and overanalyzing the charts, even if you’re a very skilled trader, you’re still not going to do well. The state of your mind and your confidence in your own abilities, as you analyze the charts, are of paramount importance to being able to properly take advantage of your trading edge. Read that last sentence again.
Tiger Woods, probably the best golfer to have ever played the game of golf, experienced some serious ups and downs in his personal life over the past 10 years. His confidence and mental state of mind went out the window, yet he still possesses the same amazing golfing skill as when he was on top. His career is far from over, but until he finds his right mind and his confidence returns (and hopefully it does for him), he won’t be able to harness his amazing skill and talent to start winning consistently again. This just goes to show that even with amazing skills, if you’re mindset isn’t right, you’re going to fail at whatever it is you’re trying to master (trading, golf, business, school, etc.)
Trading is so difficult for people because you have to control yourself in the face of constant temptations and constantly changing variables. The tendency and temptation of traders to overthink the entire trading process is immense. This is one reason you need a simplified and structured professional trading education and the guidance to keep you grounded, get you on the right track and help keep you there.
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