Information overload. Today we have a lot of information to process. New traders are attracted to lots of information. Armed with all this knowledge they are ready to make big profits in the stock market. Let's look at the information you need and how it affects profitability.
If Information Is Needed To Make Trading Decisions, Is More Information Better?
The problem with information is that you'll never have enough. Some information will always be missing. There are thousands of traders worldwide affecting price. You have no way of knowing what decisions these people will make. That missing information can change the direction of the market. There's an old saying that says 'paralysis through analysis' and that's very true. Too much information makes traders confused. They see conflicting signals. One chart says buy. The other chart or indicator says sell. So what do you do? Flip a coin? Or do you count up how many indicators say buy and how many indicators say sell? I heard one trader refer to indicators as 'friends'. How many friends do you have and which ones will you listen to?
The trouble with confusion is that it's impossible to make sound business decisions. Your mind needs to be clear. You need to know where you're getting in and where you're getting out before you take a trade. With too much information you can't think straight and since all it takes is a click of your mouse to get in and out of trades, it's easy panic and make costly mistakes.
How Many Technical Indicators Do You Need?
Technical indicators are widely used by traders for entry and exit signals. This is fine but depending on how you configure your indicators, your entry and exit decisions will be totally different. Also the more indicators you use, the more conflicting signals you'll have which leads to even more confusion. So the question is, why use technical indicators at all? Many successful traders don't use them. All they use is price. This is a perfect example of how less information can mean more profits.
How The News Affects The Stock Market
Other traders rely on the news to make their decisions. They listen to news broadcasts and market analysts for guidance on what to do. Once again the more information you have the more confused you get. One expert is bullish and the other is bearish. Which one will you listen to?
The market often moves in anticipation of the news and not the news report itself. That's why it's not unusually for the market to spike down in response to good news. This happens because investors expected good news and factored it into the price before the news was released. When the news came out, they took profits and the market falls. Also there is often disagreement as to the interpretation of the news. Some investors may think a news report is good for the market. Others might disagree. Finally, news is often a lagging indicator. It usually deals with what happened in the past and not what's happening right now or will happen in the future.
That's why you can never be sure which way the market will move in response to the news. It could move up, or it could move down, it could move up then down or down then up, or it could have no effect on the market at all. So why pay attention to the news? Good question. Some successful traders ignore the news completely for that reason. Other traders take notes on when important news is to be released and they don't trade during that time.
How Much Trading Information Is Enough?
When you have limited information your mind is free to focus on what you have. When you have lots of information your mind is tossed about like a leaf in the wind, jumping from one thing to another in hopes of understanding it all. For example, what if a price chart is the most important part of your trading system? If it is, studying secondary indicators and listening to the news may distract you from observing the most important part of your trading system. While you're distracted a lot can happen, and you can find yourself making trading decisions based on less important indicators instead of price. Too much information can scatter your mind in different directions instead of focusing it on the most important aspects of your trading system.
I find that I need just enough information so I can make wise decisions. I prefer simple trading systems because I can relax, knowing that all I need to do is follow my plan. I'm not going to be whipsawed all over the place because I know exactly when I'm going to buy and when I'm going to sell. There is no guessing. Right or wrong, I know in advance what I'm going to do and my mind is free from unnecessary distractions. Other traders may disagree and it really doesn't matter. If it's working for you why change it?
On the other hand, if you use a lot of indicators now and are confused, ask yourself this. Which indicators are absolutely essential to my profitability and which ones can I eliminate? Could I trade effectively with price alone? If not what other information is needed? I know some day traders who are using 12 monitors and they're not making any more money than traders with one monitor! As you make your computer screens less cluttered, notice how you feel. Does it feel better or worse? If you're confused and not making money in the market, consider how much information you're now using to make trading decisions. Is there a way to simplify your trading ideas and make more money with less information?