The dangers of analysis paralysis in forex and how to avoid it!

Question

Good Morning / Afternoon Anna

 – I can only imagine that you have probably answered this question many, many times already – if so could you kindly point me in the right direction ?

I am fortunate to have an eight monitor set up and am now able to view any of the big 8 currency pairs @ M5,M15,M30,H1,H4,D,W,M at the same time.

Each chart is providing me with Currency Strength and Volume indicators, 

with currently 54 profiles each comprising 8 monitors that’s a lot of charts in anybodies money. 

My question (should you decide to accept this challenge) is where do I start compiling a short list of currencies to follow and how often should I review that short list.

 Included in my 54 profiles I have 8 profiles of the main currencies – 7 monitors showing the available pair combinations with monitor 8 currently set to show the Yahoo Finance Index for that currency.

Answer

Hi – many thanks for your email and also your question and I always like a challenge so delighted to try and answer this one for you. Your opening question does in fact raise some deeper issues which stem from the number of opportunities available to us as forex traders, which can be overwhelming, and herein lies the problem. As a stock trader, either as in investor or intra day trader, the number of charts to consider is relatively limited, and generally one of considering different timeframes or tick charts, but nevertheless, here we are considering one instrument with a limited number of options in terms of analysis. Yes, it is certainly true that we have thousands of stocks to consider, but each on their own is only one chart, or a handful of charts, and with some good filtering software it is possible to sort on various parameters very quickly such as volume, 2% price moves etc, small caps, medium or large caps, earnings, etc I do this regularly for my own investing, and once reduced to a shortlist is very quick, skimming through the daily weekly and monthly charts to identify opportunities accordingly. And this brings me to the point which is this.

As a stock investor I am only considering daily, weekly and monthly charts. In other words, I have a defined strategy for the instruments and markets. I am not interested in the minute or tick based charts as I am an investor, not a swing or trend trader, or indeed a speculator. In the forex market, the problems are multiplied many times over. First we have multiple currency pairs, where currencies can be bought and sold in a multitude of ways, creating endless possibilities. Second, if the euro is strong and the US dollar is weak on the EUR/USD chart, is this universal across the markets, or simply reflected in this one chart. Third and last, is it euro strength driving the pair or US dollar weakness. These are just some of the issues we have to deal with when trading forex, and finding solutions to these problems is not easy. So perhaps starting with the issue of the number of opportunities available, this is the crux, and the answer here is to try to define your strategy, and your approach to the market first. This is the point I was making about stocks. The approach is defined, and limits the amount of analysis required. The same principles have to be applied to trading forex, and even more so, as the danger is that we become overloaded with information, and analysis paralysis sets in with so much information simply becoming overwhelming. I think with so many monitors and profiles this may be the risk you run. After all, a trend in a fast timeframe is simply a reversal or pullback in another. We are always counter trend trading somewhere – it’s a fact of life – and even more important that you have a simple strategy defined in advance which will help you to focus on those charts and timeframes which are relevant to your approach. If you are a scalping trader – that’s great – and use multiple timeframes such as a 1m, 5m and 15m as explained in my books. Or if you prefer longer term swing or trend trading, that’s fine too – again your approach is defined, and you will only then focus on those charts which are of interest to you, at that time. This is not to say that you have to stick to one approach all the time – you don’t. I trade tick charts some days in futures and spot, and longer term time based other days, with some swing trades over days and weeks – a mix of approaches. But the key is this – I always know in advance when I take a position, the period I am likely to be holding that for, and as a consequence the charts of interest, for that position.

Moving to the next part of your question – and as I outlined above – one of the issues in forex is identifying global strength and weakness in a currency. Is it being bought or sold universally and for this you can create a simple currency matrix with the 7 pairs on one profile which will then help to answer this question. Again this needs to be matched to your trading approach, so the information is relevant in terms of timframes etc. I have developed an automated currency matrix for MT4 which does this for me, so saves a huge amount of time and desktop space! Thanks once again for a great question and wishing you every success in your trading – Anna

About Anna 1040 Articles

Hi – my name is Anna Coulling and I am a full time currency, commodities and equities trader. I have been involved in both trading and investing for over fifteen years and have traded many different financial instruments, from options and futures to stocks and commodities. I write and publish articles ( mostly for free ) for UK and international publications on a wide variety of financial issues, and in particular I enjoy helping others learn how to invest and trade.

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