➡️Technical analysis (TA) is one of the most commonly used methods for analyzing financial markets.
➡️TA can be applied practically to any traditional asset market, be it stocks, forex, gold, or cryptocurrency.
MISTAKE #1️⃣
1️⃣Unwillingness to cut losing positions
Let's start with a quote from trader Ed Seykota:
Elements of good trading: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.
This may seem to you like a very simple rule, but we believe it necessary to emphasize its importance. When it comes to trading and investing, protecting your capital should always be priority number one.
Trading may seem quite complicated to you. It is believed that the right approach to starting trading is as follows: the main goal is not to win, but not to lose. That’s why we recommend you start with a smaller position size, or even not trade with real funds at all. For example, on Binance Futures there is a testnet where you can try your strategies before taking risks. In this way, you can protect your capital and risk it only when you systematically start achieving good results.
Setting a stop-limit is simple rationality, as your trades should always have a point of failure. This refers to the moment when you 'bite your elbows' and acknowledge that your trading idea was wrong. If you do not apply this in your trading, you are likely to not succeed in the long run, as even one bad trade can have a disastrous impact on your entire portfolio, and eventually, you may continue to hold a losing portfolio, hoping for a market recovery.
Mistake #2️⃣
2. Overtrading
A common mistake among active traders is the belief that they must trade constantly. In reality, trading involves a lot of analysis and patience. For some trading strategies, it may take quite some time to get an accurate signal to enter a trade. Successful traders may execute fewer than three trades a year and still make a significant profit.
Take note of a quote from trader Jesse Livermore, one of the pioneers of day trading:
"Money is made by sitting (in positions), not by trading."
Try not to enter a position just for the sake of opening it; your trade should not always be active in the market. In fact, in some market conditions, it is more beneficial to do nothing while waiting for an opportune moment. This way, you will preserve your capital and be ready to use it when good trading opportunities arise again. It is worth noting that opportunities will always return, and they just need to be awaited.
A similar trading mistake is overvaluing on smaller timeframes. Analysis conducted on higher timeframes will generally be more reliable than that on smaller ones. Thus, small timeframes will create a lot of market noise and may prompt you to enter trades more frequently. Despite there being quite a few successful scalpers and short-term profitable traders, trading on small timeframes leads to poor risk-to-reward ratios. Being a risky trading strategy, it is certainly not recommended for beginners.
Mistake #3️⃣
3. Revenge trading
Quite often, traders try to immediately recover their losses, and we call such trading – market revenge. It doesn't matter whether you want to be a technical analyst, day trader, or swing trader – it is extremely important to avoid making emotional decisions.
It is easy to remain calm when things are going well, or even when you make small mistakes. But can you stay calm when everything goes awry? Will you be able to stick to your trading plan even in moments of widespread panic?
Based on the concept of "technical analysis," the word "analysis" implies an analytical approach to the markets, right? In that case, is it appropriate to make hasty and emotional decisions? If you want to be among the best traders, you should remain calm even after the most colossal mistakes. Avoid emotional decisions and focus on maintaining logical and analytical thinking.
Opening new positions immediately after previous ones have incurred significant losses leads to even greater losses. Some traders, after a series of failures, may even refrain from trading for an extended period, only to return to trading with a clearer mind.
Mistake #4️⃣
4. Excessive self-confidence in your actions and unwillingness to adapt to market conditions
If you want to become a successful trader, do not be afraid to change your established approaches to trading. Market conditions are highly volatile; this is their main characteristic. Your job as a trader is to timely recognize these changes and successfully adapt to them. A strategy that works well in one market environment may be useless in another.
Let's consider a quote from legendary trader Paul Tudor Jones regarding his positions:
"Every day I assume that every one of my positions is wrong."
A good practice would be to try to look at your own arguments regarding your strategies from another perspective; this will help you identify all potential flaws. In this way, your investment preferences (decisions) can become more comprehensive.
This similar approach raises another problem: cognitive biases. Biases can greatly affect decision-making, cloud your reasoning, and limit the range of options you may consider. Try to understand the cognitive biases that can affect your trading plans so that you can more effectively mitigate their consequences.
Mistake #5️⃣
5. Ignoring extreme market conditions
There are moments when TA forecasts may be less reliable, for example during black swan events or other types of extreme market conditions, which are largely driven by emotions and crowd psychology. You must understand that markets, which move relative to supply and demand, imply a balanced position relative to one another.
Let's consider this with the example of relative strength index (from the English Relative Strength Index, abbreviated RSI), a momentum indicator. Generally, if RSI readings show a number below 30, this asset is considered oversold. In this case, is a drop of this indicator below 30 a direct trading signal? Of course not! In fact, it means that during this current period, the market momentum is being driven by the side that is selling assets; in other words, it indicates that there are more sellers than buyers.
RSI can reach extreme levels during unusual market conditions. The index can reach a single digit – as close as possible to the minimum possible value (zero), but even such an extremely oversold value does not mean that a reversal is imminent.
Blindly making decisions based on TA tools that display extremely high readings can lead to significant losses. This mistake is particularly common during black swan events, when forecasting can be extremely difficult. In such moments, markets can continue to move in any direction, and no analytical tool will stop them. That’s why it is always important to consider multiple factors, rather than rely on a single tool.
Mistake #6️⃣
6. Forgetting that TA is a theory of probability
Technical analysis does not provide absolutely reliable information, as it is based on a kind of probability theory. This means that when using any tool for technical analysis on which you develop your strategies, there are no guarantees that the market will behave as you expect. Your analysis may calculate a very high probability that the market will go up or down, but this is not an accurate prediction of future movements.
When developing your trading strategies, always take into account the fact that the market is most likely not going to follow your analysis, regardless of how experienced a trader you are. Consider, if you decide to form trades based on signals from TA indicators while using large orders, you are significantly risking losing a substantial portion of your trading balance.
Mistake #7️⃣
7. Blindly duplicating the actions of other traders
You need to constantly improve your skills if you want to succeed in any field. This is especially important when it comes to trading in financial markets, as market conditions are constantly changing and without certain experience it will be difficult to keep track of them. One of the best ways to learn is to follow experienced technical analysts and traders.
If you plan to consistently make a profit, you need to find your strengths, develop them, and become one of the best; then you will have an advantage over other traders.
If you read a lot of different interviews with successful traders, you will likely notice that they have completely different strategies. In fact, a strategy that works excellently for one trader may be considered absolutely unacceptable by others. There are many ways to make money in cryptocurrency markets; you just need to find the one that suits you and your trading style best.
You must understand that blindly duplicating the actions of other traders, without understanding the underlying context of their strategies, will not work in the long run, as entering a trade based on someone else's analysis may only work a few times. This does not mean that you should not learn from others; what’s important is whether you agree with the trading idea and whether it fits into your trading strategy. You should not blindly follow other traders, even if they are experienced and authoritative.
Summaries
Here we have considered some of the most fundamental mistakes to avoid when using technical analysis. Always remember that trading is not an easy task, and it is usually more prudent to approach it with a long-term mindset.
Consistent and effective trading is a process that requires a significant amount of time from you. It requires a lot of practice in refining your trading strategies and formulating your own trading ideas. In this way, you can find your strengths, identify your weaknesses, and begin to control your investment and trading decisions.
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