Don’t Let “Noise” Ruin Your Trades

10/28/2011 1:30 pm EST

Focus: STRATEGIES

Leslie Jouflas

Professional Trader and Founder, TradingLiveOnline.com

Don’t Let “Noise” Ruin Your Trades

Leslie Jouflas explains that "noise," or excessive information in trading, can often cause clouded judgment or even the dreaded "analysis paralysis." Here, she explains how to stay on track.

Leslie Jouflas is my guest, and Leslie, how does thinking affect trading?

Well that’s an interesting question, and maybe a couple of parts for the answer to that.

Thinking can help traders, or it can totally throw traders off track, and this is what I mean by that. Especially for short-term traders who are watching price activity very actively, prices take on meaning depending on what their position is. 

Let’s say a trader went long, but the market starts to go down. Most likely, their thinking process may start to change, and they’re putting a lot of meaning and emotion on the downward movement against their position. 

So, at that point, if a trader does not have a solid trading plan to follow, their thinking is probably not going to be helping them make important decisions in real time as to what to do with a trade that may be going against them. 

Thinking can have a negative impact on traders—it’s what I call “head chatter,” and that’s when the head chatter starts to take over the trader’s trading plan and cause them to take spontaneous actions that are going to probably impact results in a negative way. 

How do you quiet that head chatter?

I believe practicing with a solid trade plan is the way to do it, and this takes a lot of repetitions in order for traders to achieve a quiet mindset that is absolutely necessary for good trading.

Personally, I like to base my decisions in the markets on technicals. Separating that from emotion helps me to stay focused on what the price data is telling me. Is there something really wrong with this trade, or is it just kind of jiggling around doing some testing?  

So, I look at the technicals to help me make any discretionary decisions that might be a little bit off of what my trade plan is. But another way traders can help themselves is to come in to the markets prepared, and so most of the thinking can be done before the markets ever open.

That’s by doing their homework, doing a good routine, and being prepared when the market opens; that way they’re going to be starting on solid ground and when the head chatter starts, they should be able to quiet it down by going back to their trading plan and their homework. 

Can overthinking lead to paralysis?

Absolutely it can. Absolutely, and again, traders starting out, I know it’s fun to put all kinds of colorful indicators all over a price chart, but that can cause a lot of negative thinking in a trader.

For anyone reading this, you can test yourself by watching all of those indicators on your chart and just making some notes of what thoughts come up with it.

If there are too many things and there is too much thinking going on, the trader can freeze and then miss an opportunity.

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