Too many choices will make any choice seem impossible.
This is a theory I have had for a really long time buried in my subconscious. Matt and I have discussed it over cigars several times and I even ran my own little “experiment” regarding this idea. It was super scientific so hopefully it will be written up in some medical journal some where… ok so it wasn’t very scientific.
It happened on Halloween of this last year. My kids got home with bags and bags of sugary goodness that was handed out to them simply for dressing up how they normally do, in some kind of costume, and then showing up and ringing a doorbell. The fruits of this labor were spread out on the living room floor. A mountain of candy and plastic rings and popcorn balls that all three of my kids towered over and wanted to eat every piece of that night. My wife and I did the normal kill joy parent routine and told them they could have one piece tonight because it was bed time. After groans and moans and ten minutes of indecision, it hit me.
At first I thought they were just stalling so as not to have to go to bed but that was not the case at all. There were in fact too many choices and it made them not be able to make a decision. So I decided to try something. I picked up three different pieces of candy and asked them to chose from those. Instantaneous decision. Why? Because Snickers vs. every other candy in the pile is a much harder decision than Snickers vs. Kit Kat.
Barry Schwartz, Author “The Paradox of Choice: Why More is Less”, states in his TED Talk below that “The more options there are, the easier it is to regret anything at all that is disappointing about the option that you chose.” This is the traders battle…
On a daily basis I watch 8 FX pairs. That by itself presents a multitude of daily decisions. Which pair today? Why? And then take that 8 and multiply it by 6 possible time frames; the D, 4hr, 1hr, 15m, 5m, and 1m. Thats 48 different options and that is before you get to price movement on those charts. The numbers go up pretty quickly when we realize how many decisions are possible on every single current candle that prints. It’s overwhelming at best.
But that’s a traders job. Be a professional decision picker and decision maker.
This is why a trading plan that defines your decision making areas is so important to create and maintain. Whats the only way that we as traders can cut out some of those decisions? We have to know what the decision looks like. That’s what the plan is for: Defining the decision. Not defining the outcome. There is a big difference. ONLY when we define the decision do we even have the opportunity to make the right one. Otherwise, we are just guessing and when we are trying for a Baby Ruth, we end up with Sweet Tarts and wonder what happened…
To sit and create a trading plan that “defines the outcome” has just never worked for me. I’ve done it so many times. “I will make 10 pips a day…” I will make $250 a day…” Ok. Cool. Basically what your saying then is that your on one of those game shows that you have to pick door one, two, or three, except on this show there are 648 doors every day to choose from and only one of them holds your pips or your money for the day. The probabilities are not in your favor in that scenario.
The plan is the equalizer. It cuts down on the number of possible doors considerably! My plan is simple, and I think the more simple the better. 1) I wait for price to get to S&R on higher time frame charts, 4hr and above. 2) I determine the trend on those time frames using simple MA’s 3) I take a trade in the direction of trend on a lower time frame chart with specific entry rules when price gives the signal that its headed back toward trend. Simple. So I don’t have anything to do when price is in between S&R levels. Boom. That narrows down a ton of trade-able space on my charts. Trend analysis takes away the next 50% of those remaining options. I will only buy or sell depending on trend analysis so bam, more choices gone. And finally, price has to do a very specific move on a lower time frame chart for me to enter. Again, narrowing down choices. The plan is to weed out the crap and find the trade opportunities that make it right or wrong, Snickers vs. Kit Kat, as fast as possible.
As I was spending time thinking about this topic, i went ahead and did what everybody does and I Google-d it. Well, I have to say I found a brilliant article on the subject. Check it out here. It has nothing to do with trading and everything to with style and fashion (which if you know me, ummmmmm let’s just say I don’t frequently ask for this kind of advice…) but the trader theme runs blatantly through it even if by accident. You can check it out below.
So once we have done all of this, we have cut out the choices that drag us down and have defined what exactly a trading decision looks like, then all that’s left to do is throw our shoulders back, sit up straight, and make that decision with ultimate conviction and confidence.
Let’s be the best traders we have ever been in 2015. It’s time to take control and make it happen. Happy new year everyone! Thanks for reading.