Analysis Paralysis – Part 2 – Over-Analysis

By D. R. Barton Jr. 

“A hundred wagon loads of thoughts will not pay a single ounce of debt.”–Italian Proverb

Does a good engineer, doctor, accountant, computer programmer or other analytically trained professional make a bad trader?

As with most complex questions, a good answer is “It depends.” On the one hand, folks that have this type of background are usually very quick to grasp the concepts of technical analysis and can be very controlled practitioners of systematic trading. On the other hand, those of us who have had years of education and practical experience in fields that reward exactness, attention to detail and “being right” have real barriers to overcome as traders.

Analytically trained professionals tend to have the most problem accepting that sometimes our models don’t work. Sometimes the markets just don’t make sense. And lots of times we’re just plain wrong about the markets!

When it turns out they’ve made an incorrect prognostication in the markets, most new traders (especially the technically trained ones) tend to add complexity in order to understand where they went wrong: extra indicators, more filters, optimization.

It’s time to apply years of training and practice in fields that specialize in problem solving to this special problem called the markets. But instead of “solving the problem,” we step on our heads.

Here’s the tough part: sometimes we can’t solve the problem. In many areas of life, (trading and investing being the one we’re focused on here) there is too much uncertainty or variability involved to definitively solve the problem. Sometimes the best we can do is to find an edge and take advantage of it. Now, before all of my tech buddies freak out, that edge can usually be quantified and put into statistical language. (Whew. For a minute there it looked like this was going to be about psychology and learning “the rhythm of the markets” and all that soft stuff…)

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