the introduction
Technical analysis is one of the most widely used methods for analyzing financial markets. Technical analysis can apply to basically any financial market, be it the stock market, gold, or cryptocurrencies.
Although the basic principles of technical analysis are relatively easy to understand, they are difficult to master. When learning any new skill, it is normal to make many mistakes. This can cause harm when it comes to trading or investing. If you do not be careful and learn from your mistakes, you risk losing a large portion of your capital. Learning from your past mistakes is good, but working to avoid them as much as possible will be much better.
This article will discuss some of the most common mistakes in technical analysis. If you're new to trading, why not look at the basics of technical analysis first? Please see the article What is Technical Analysis? And 5 basic indicators used in technical analysis.
So what are the most common mistakes beginners make when trading using technical analysis?
1. Not minimizing losses
Let's start with a quote from commodity trader Ed Sekota:
“The elements of successful trading are: (1) minimizing losses, (2) minimizing losses, and (3) minimizing losses. If you can follow these three rules, you might stand a chance.”
This seems like a simple step, but it is always good to emphasize how important it is. When it comes to trading and investing, protecting your capital should always be your top priority.
Starting trading can be a daunting task. A solid approach to keep in mind when starting trading is as follows: The first step is not to make gains, but to not incur losses. Therefore, it may be better to start with small trades, or not risk real money. The Binance futures platform, for example, offers a demo network that allows you to try out your strategies before risking your hard-earned money. Thus, you can protect your capital and only risk it once you consistently achieve good results.
Setting a stop loss limit is rational. Every trade must have a return point, when you admit it to yourself and accept that the idea of the trade was wrong. If you don't adopt this way of thinking and apply it to all of your trading trades, you probably won't do well in the long run. One bad trade can have a very detrimental impact on your investment portfolio, and you may end up recording losses, hoping the market will recover.
2. Excessive trading
When you become an active trader, thinking that you always need to enter a trade is a common mistake. The trading process involves many analysis processes as well as a lot of waiting and patience. According to some trading strategies, you may need to wait a long time in order to get a reliable signal to enter a new trade. Some traders may enter as few as three trades a year and achieve record returns.
Please see what trader, Jesse Livermore, one of the pioneers of day trading, said:
“Money is made by waiting, not trading.”
You should try to avoid entering into a trade without a reason. You don't have to always enter into trading deals. In fact, in some market conditions it may be profitable to wait until the opportunity presents itself. This way you keep your capital ready to invest when good trading opportunities arise again. It must be taken into account that opportunities will be available again, so you should just wait.
Another common mistake is to focus too much on short time frames. In general, technical analysis on larger time frames will be more reliable than analysis based on lower time frames. Therefore, short time frames create market dispersion and may tempt you to enter into more trades. Although there are many successful speculators and profitable short-term traders, trading within short time frames often results in a poor risk-reward ratio. Since it is a risky trading strategy, we definitely do not recommend it to novice traders.
3. Revenge trading
It is common to see traders trying to recover large losses immediately. This is what we call revenge trading. It doesn't actually matter whether you want to become a technical analyst, a day trader, or a swing trader – avoiding emotional decisions is extremely important.
It's easy to keep calm when things are going well, or even when you make small mistakes. But can you stay calm when things go completely wrong? Can you stick to your trading plan, even when all the investors are panicking?
Notice that the word “analysis” is in the phrase technical analysis, it naturally refers to an analytical approach to the markets, right? So, why would you want to make hasty and emotional decisions in such a setting? If you want to become one of the best traders, you must remain calm even after making big mistakes. Therefore, you should avoid making emotional decisions and focus on adopting an analytical and rational way of thinking.
Trading after recording large losses immediately leads to recording further losses. Therefore, some investors may not trade at all for a period of time after experiencing significant losses. This way, the trader can start over with a clear mind.
4. Stubbornness and clinging to opinions
If you want to become a successful trader, don't be afraid to change your mind often. Market conditions can change quickly and one thing is for sure, they will continue to change. Your role as a trader is to recognize these changes and work to adapt to them. Some strategies that are useful in one market environment may not be suitable for another market environment.
Let's read below what trading legend, Paul Tudor Jones, had to say about his trading trades:
“I assume every day that all my trades are wrong.”
It's helpful to try to think about the other side of your approach to see potential weaknesses. In this way, your investment ideas (decisions) become more comprehensive.
This also touches on another topic: cognitive biases. Biases can greatly influence your decision-making, cloud your judgment and limit the range of possibilities you can consider. Therefore, make sure you understand and understand the cognitive biases that may affect your trading plans; This is with the aim of reducing its effects in a more effective way.
5. Ignore extreme market conditions
Sometimes the reliability of the predictive properties of technical analysis decreases. This could be an unexpected event or some other type of extreme market condition driven by emotions and crowd psychology. After all, markets are usually driven by levels of supply and demand, and can sometimes be one-sidedly unbalanced.
Take, for example, the Relative Strength Index (RSI), which is a momentum indicator. Generally, if the number is less than 30, the asset being tracked can be considered to be in an oversold zone. Does this mean it is an immediate signal to enter a trade when the Relative Strength Index (RSI) drops below 30? of course not! It just means that the sell side controls the market momentum. In other words, this indicates that selling power is greater than purchasing power.
The Relative Strength Index (RSI) reaches extreme levels during unusual market conditions. It may drop to single digits - near the lowest possible number (zero). The number of a best-selling asset does not necessarily mean that a reversal is about to occur.
Making random decisions based on technical tools that reach extreme numbers may result in you losing a lot of your money. This is especially true during an unexpected event when price movements are exceptionally difficult to read. During these times, the markets continue to trend in one direction or the other, and no analytical tool can stop it. For this reason it is always important to take other factors into consideration and it is recommended not to rely on a single tool.
6. Forgetting that technical analysis is based on probabilities
Technical analysis does not deal with absolutes, but with probabilities. This means that whatever technical approach you base your trading strategy on, there is no guarantee that the market will go in the direction you expect. Your analysis may indicate that there is a high probability that the market is moving up or down, but it is still not certain.
You have to take this into consideration when developing your trading strategy. Whatever your experience, it is never a good idea to think that the market will follow your analyses. If you do this, you are at risk of exaggerating the amounts, betting too much on one outcome, and risking huge financial losses.
7. Follow other traders without thinking
Continuously developing your abilities is an essential necessity if you want to master any skill. This is true when it comes to trading in the financial markets. In fact, changing market conditions make this necessary. The best way to learn is to follow technical analysts and experienced traders.
However, if you want to constantly improve, you will also need to recognize your strengths and work on improving them. This is what we call scores of differentiation, which is what makes you stand out from the crowd as a trader.
If you look at many interviews with successful traders, you will definitely notice that each of them has a different strategy. In fact, a strategy that works for one trader may not work for another trader at all. There are an unlimited number of methods that can be followed to achieve profits from trading in the markets. You'll just need to find what suits your personality and trading style.
Entering a trade based on someone else's analysis may work a few times, but if you blindly follow other traders and without understanding the underlying context, it will definitely not work in the long run. This certainly does not mean that you should not follow others and learn from them. But the important thing is whether you agree with the trade idea or it fits into your trading system. You should not blindly follow other traders, even if they have great experience and a good reputation.
Concluding thoughts
We've covered most of the mistakes you should avoid when using technical analysis. Remember that trading is not easy, and it is best to approach it with a long-term mindset.
Continuously mastering trading is a time-consuming process, and requires a lot of practice to develop your own trading strategies as well as learning how to come up with trading ideas. This way, you can recognize your strengths and take control of your investment and trading decisions.