Avoiding Decision Crisis - Market Analysis for Nov 25th, 2020

Some of you have heard me mention 'decision crisis' on our Saturday morning campfire sessions (Aka Webinars). 'Decision Crisis' is either a term I can take credit for, or something bestowed on me by osmosis. I thought I'd take the time to elaborate. 

Let's dive into a very common thought process on EWT I observe frequently:

A member is stalking a trade. They take a look at the count of a favorite analyst. It's Bullish!. Awesome! He's putting those long tickets together. Then he peaks at another analyst's count and it's looking for lower before long. Ai Caramba. Confusion! What to do? He asks the board. 'Anyone going long XYZ here?' A smart member says looking for lower. Ok. He relents. But then he missed a big entry. He leaves a nasty comment on the board. He got bad advice. 

This journey wades through a couple fallacies:

1. It assumes three smart traders agreeing makes a POV higher probability. False. If say all traders were even 75% right all the time which is rare, that leaves a big window for all three to be wrong. 

2. It assumes the trading game is won by being right. False. Most long term traders success ratio hovers around 50%, below or above slightly, but long term success is achieved by extracting skew. (higher avg win vs. lower avg loss). 

Lastly this journey rips off the novice trader from developing a key mental trait to success: the ability to boldly take a trade when the risk to reward is solid, and to ditch it if it doesn't work. Multiple, potentially conflicting inputs to a trade doesn't make decisions bold. It leads to decision crisis and analysis paralysis. 

To be clear, I am not saying you shouldn't follow different analysts. However, what you need to extract is risk to reward not their opinion on your trade. When mixing analysis I suggest a couple approaches:

1. If based on Elliott wave, and levels differ, you might consider giving room in your position size for both, or pick an analyst's level and stick to it. Now I warn that recency bias moves in here. If you are picking an analyst based on them being right a lot lately, you are falling into a logical trap. Mean reversion in their work may set in just in time for your trade. 

2. If one is bearish and one is bullish ask for levels where they'll change their mind. That's a pivot to trade against usually. 

Note I am not arguing about using two different types of inputs for a trade. Perhaps you use an analyst's levels but add your own technical signals. That's solid and is not conflicting inputs. They are complementary. That is not the case with two 'counts', unless you skillfully blend the levels into a trade. 

Moving deeper into the Crypto service, this became a point of confusion when I outted our service algo signals. Some asked why I was bearish EW wise, but my algo is long, for example. The reason can be simple:

1. I know EW is not infallible. It is the center of my work and guides most of my trades. But it is still interpretive with objective levels. 

2. I purposely pursued the algos to set a different strategy that offered quantitative performance measure. I have to say having these tools takes the mental load off if you use them right. 

3 The algos themselves have success ratios are not infallible. But those stats (edge, skew) can be used to define exposure with quarterly reviews. 

4. I bucket my EW trades and my algos into carefully chosen strategy exposure buckets. I could potentially trade a EW based trade one direction in one account, and trade an algo another direction. This prevents decision crisis. 

5. Note that two traders can take opposite trades and both be right if trading different timeframes. Sometimes the algos work against EW in this way. 

I hope this makes sense, and I challenge you to put this mental process into practice. You'll learn to find a bold mental state needed for trading. You'll be forced to keep honest stats and learn to exploit real edges. And, you'll realize that analysis is not about being right or wrong but about achieving parameters that are viable for a trade. 

Ryan Wilday hosts the Crypto Waves service on ElliottWaveTrader.net.