Table of contents

  • Introduction

  • No stop loss

  • Overtrading

  • Revenge Trading

  • Too stubborn

  • Ignoring extreme market conditions

  • Forget that technical analysis is a game of probability

  • Blindly following other traders

  • Summarize


Introduction

Technical analysis (TA) is one of the most commonly used methods when analyzing financial markets. It can be applied to basically any financial market, whether it is stocks, forex, gold or cryptocurrencies.

It's easy to understand the basic concepts of technical analysis, but it's a very difficult thing to truly master them. When you learn a new skill, you're bound to make a lot of mistakes along the way. And when it comes to trading or investing, it can be very costly if you're not careful. If you don't learn from your mistakes, you can lose a large portion of your money. While it's good to learn from your mistakes, it's better to avoid them as much as possible.

This article will introduce you to some of the most common mistakes in technical analysis. If you are new to trading, you may want to first understand some basic knowledge about technical analysis. Please read "What is Technical Analysis?" and "5 Basic Indicators Used in Technical Analysis".

So, what are the most common mistakes that beginners make when using technical analysis to trade?


1. No stop loss

Commodity trader Ed Seykota once said:

“A good trade has these elements: (1) stop, (2) stop, and (3) stop. Only by following these three rules can you have a chance.”

It may seem like a very simple step, but its importance cannot be overstated. When it comes to trading and investing, protecting your funds should always be your first priority.

Trading can be a daunting task right from the start. A prudent approach you should consider at this point is that the first step is not to win, but to not lose. Because of this, it is more beneficial to start with a small position size or not risk real money. For example, Binance Futures has a testnet that you can use to test your strategy before investing in real money. This way you can protect your capital and only risk it if it consistently produces good results.

Setting a stop loss is simple and reasonable. Your trades should have a failure point. This is the point where you "suck it up" and admit that your trading strategy was wrong. If you don't apply this mentality to your trading, you will have a hard time having the best investment performance in the long run. Even just one bad trade can have a very negative impact on your portfolio, and you may end up with a lot of losses and hope that the market will recover.


2. Overtrading

Once you become an active trader, a common misconception is that you need to trade frequently. Trading requires a lot of analysis and, in many cases, patience! With certain trading strategies, you may have to wait a long time before you get a reliable signal to enter a trade. Some traders may make less than three trades per year and still earn good returns.

Jesse Livermore, one of the pioneers of day trading, once said:

“You make money by waiting, not by trading.”

Try to avoid trading just for the sake of trading. You don't have to trade all the time. In fact, in certain market conditions, it is more profitable to do nothing and wait for opportunities to appear. This way, you can protect your capital and you will be ready to deploy it once a good trading opportunity comes again. The important thing to remember is that opportunities will always come and go, you just need to be patient and wait.

Another similar trading mistake is to overemphasize the shorter timeframes. Analysis conducted on longer timeframes tends to be more reliable than analysis conducted on shorter timeframes. Therefore, the shorter timeframes will generate a lot of market noise and may tempt you to enter trades more frequently. Although there are many successful scalpers and short-term profitable traders, trading on shorter timeframes usually results in a poor risk/reward ratio. Such a high-risk trading strategy is certainly not recommended for beginners.


3. Revenge Trading

It is common for traders to try to recover immediately after experiencing a significant loss. This is known as “revenge trading.” Whether you want to be a technical analyst, day trader, or swing trader, it is crucial to avoid making emotional decisions.

It's easy to stay calm when things are going well, or even when you make a few small mistakes. But can you stay calm when things are going completely against you? Can you stick to your trading plan when everyone else is panicking?

Note the word "analysis" in technical analysis. It naturally refers to taking an analytical approach to the markets, right? In that case, why would you make rash, emotional decisions? If you want to be the best trader you can be, you should be able to stay calm even when you make big mistakes. Instead of making emotional decisions, focus on maintaining a logical and analytical mindset.

Trading immediately after a big loss can often lead to even bigger losses. For this reason, some traders may take a break from trading for a period of time after a big loss. This way, they can have a fresh start and start trading again with a clear mind.


Want to start your cryptocurrency journey? Buy Bitcoin on Binance now!


4. Being too opinionated

If you want to be a successful trader, get used to changing your mind. Market conditions change rapidly, but one thing is certain: the biggest constant is change. As a trader, your job is to identify these changes and adapt to them. A strategy that works very well in a certain market environment may not work at all in another.

Legendary trader Paul Tudor Jones once said this about his positions:

“Every day, I assume that my position is wrong.”

It's good practice to try to see opposing sides of your view and identify potential weaknesses in them. This way, your investment thesis (and decisions) will become more well-rounded.

This brings us to another topic: cognitive biases. Biases can seriously affect your decision making, cloud your judgment, and limit the possibilities you consider. Make sure you at least understand the cognitive biases that may be affecting your trading plans so you can more effectively mitigate their consequences.


5. Ignoring extreme market conditions

There are times when the predictive quality of technical analysis becomes less reliable, such as in “black swan events” or other extreme market conditions that are largely driven by emotions and mass psychology. Ultimately, markets are driven by supply and demand, which can sometimes become extremely unbalanced in one direction.

Take the momentum indicator Relative Strength Index (RSI) for example. Generally speaking, if the index is below 30, the asset on the chart may be considered oversold. Does this mean that when the RSI is below 30, it is an immediate trading signal? Of course not! It simply means that the momentum of the market is currently determined by the sellers. In other words, it simply shows that the sellers are more powerful than the buyers.

Under abnormal market conditions, the RSI can reach extreme levels. It may even drop to single digits — close to the lowest possible reading (zero). Even such extreme oversold readings do not necessarily mean a reversal is imminent.


Blindly making decisions based on technical tools that reach extreme readings can cost you dearly. This is especially true during "black swan events" when price action can be particularly unpredictable. During such times, the market may continue to move in one direction or another, and no analytical tool can stop it. This is why it is important to consider other factors as well and not rely solely on a single tool.


6. Forget that technical analysis is a game of probability

Technical analysis is not absolute, but only probabilities. This means that no matter what technical method your strategy is based on, there is no guarantee that the market will behave as you expect. Maybe your analysis shows that there is a high probability that the market will rise or fall, but this is not a certainty.

You need to take this into account when developing a trading strategy. No matter how experienced you are, you should never expect the market to develop in the way you analyze it. Otherwise, you can easily go all out and end up with huge financial losses.


7. Blindly following other traders

If you want to master any skill, you must constantly improve your skills. This is especially true when trading in financial markets. In fact, to adapt to changing market conditions, you must improve your skills. One of the best ways to learn is to follow experienced technical analysts and traders.

However, if you want to consistently outperform, you need to find your strengths and capitalize on them. These are your advantages and what sets you apart from other traders.

If you read many interviews with successful traders, you will definitely notice that they all have different strategies. In fact, a strategy that works very well for one trader may not be feasible for another trader. There are countless ways to profit from the market. You just need to find the trading method that best suits your personality traits and trading style.

Trading based on someone else's analysis may work occasionally. However, if you just blindly follow other traders without understanding the underlying situation, this approach will never work in the long run. Of course, this does not mean that you should not follow others and learn from them. The key is whether you agree with the trading concept and whether it is suitable for your trading system. You should not blindly follow even experienced and reputable traders.


Summarize

We have explored some of the most basic mistakes you should avoid when using technical analysis. Remember, trading is not easy and keeping a longer-term mindset is the way to go in the long run.

To have a consistently good trading performance, it takes a long time to hone your skills. You need a lot of practice to perfect your trading strategy and learn how to form your own trading philosophy. In this way, you can find your strengths, discover your shortcomings, and take control of your investment and trading decisions.

If you want to learn more about chart analysis, read 12 Popular Candlestick Chart Patterns Used in Technical Analysis.