Technical analysis (TA) is one of the most used ways to analyze financial markets. TA can be applied to any underlying financial market, whether it is stocks, forex, gold, or cryptocurrencies.
1. Introduction
While the basic concepts of technical analysis are relatively easy to grasp, there is an art to mastering them. If you are not careful and learn from your mistakes, users will most likely risk losing a significant portion of their capital. Learning from mistakes is great, but if you can avoid unnecessary mistakes, things will become easier.
This article will introduce readers to some of the most common errors in technical analysis. If you're new to trading, why not learn some of the basics of technical analysis?
The article below covers the most common mistakes beginners make when trading with technical analysis.
2. Don't cut losses
Investor Ed Seykota once said:
"The core elements of trading are: (1) stop loss, (2) stop loss and (3) stop loss. If you can follow these three principles, you can have a chance of winning the trade.
This seems like a simple step, but it is extremely important. When it comes to trading and investing, protecting your capital is always the number one priority.
Getting started with trading can be difficult. A solid approach that users can consider when starting to trade is: “initially there is no need to make a profit, just no loss.” This way, users can protect their capital and only venture when they consistently produce good results.
Setting stop - loss (stop loss level) is a very simple task. The transaction needs to have a void point. This will be the time when users should endure and accept that their trading ideas are wrong. If you do not apply this thinking to your trading, users may make wrong moves in the long term.
3. Excessive trading
As a trader, the most common mistake is always thinking that you need to participate in trading. Trading here involves a lot of analysis and also sitting around and waiting patiently! With some trading strategies, users may have to wait a long time to get a reliable signal to enter a trade. Some traders can enter fewer than three trades per year and still be able to generate outstanding profits.
Trader Jesse Livermore once said:
“Money is made by sitting, not by trading.”
Try to avoid entering into a trade just for the sake of it. Users do not always need to be in a transaction. In fact, in some market conditions, it is actually more profitable to do nothing and wait for a new opportunity. This way, users will be able to preserve their capital and be ready to deploy once potential trading opportunities arise again. It is worth remembering that opportunities will always return, as long as users can wait patiently.
A similar trading mistake is focusing too much on lower timeframes. Analysis performed on larger timeframes will often be more reliable than analysis performed on lower timeframes. Although there are many successful speculators and short-term profitable traders, trading on lower timeframes often yields a bad risk/reward ratio. And since it is a risky trading strategy, it is definitely not recommended for beginners.
4. Revenge trading
It is quite common for traders to try to make a profit immediately after a significant loss. This action is called revenge trading.
It's easy to stay calm when things are going well, or even when you make a small mistake. But can you stay calm when things go completely wrong? Can you stick to your trading plan, even when everyone else is panicking?
Note the word “analysis” in technical analysis; it implies a market analytical approach, right? So why do you want to make such a hasty and emotional decision? If you want to become one of the best traders, you need to stay calm even after the biggest mistakes. Avoid making emotional decisions, and focus on keeping a logical mindset.
Trading immediately after suffering a large loss tends to result in further losses. As such, some traders may not even trade for a period of time after a large loss. This way, they can have a fresh start and return to trading with a clearer train of thought.
5. Too stubborn to change your mind
If you want to become a successful trader, don't be afraid to change your thinking. Market conditions can change quickly, and one thing is certain: they will continue to change. A trader's job is to recognize changes and adapt to them. A strategy that may work well in a particular market environment may not be applicable in another.
Watch legendary trader Paul Tudor Jones discuss his positions:
“Every day I assume every position I have is wrong.”
It's good to try to look at other sides of your arguments to see their potential weaknesses. This way, your investment thesis (and decisions) can become more comprehensive.
This also brings up another point: trend awareness. Bias can greatly influence a user's decision-making, clouding your judgment and limiting the range of possibilities you can consider. Be sure to understand at least the cognitive biases that can affect your trading plan, so you can mitigate their consequences more effectively.
6. Ignore harsh market conditions
There are times when the predictive properties of TA become less reliable. These can be black swan events or other types of extreme volatility market conditions that are heavily driven by emotions and crowd psychology. Ultimately, markets are driven by supply and demand, and there can be times when the market is extremely unbalanced and skewed to one side.
Take the example of the Relative Strength Index (RSI), a momentum indicator. In general, if the index is below 30, the franchise property may be considered oversold. Does this mean that it is an immediate trading signal when the RSI falls below 30? Absolutely not! It just means that the market's momentum is currently being dictated by the selling side. In other words, it just shows that the sellers are stronger than the buyers.
The RSI can reach extreme volatility during unusual market conditions. It can even drop to single digits - close to the lowest possible reading (zero). Even such an extreme oversold reading may not necessarily mean a reversal is imminent.
Making blind decisions based on technical instruments reaching extreme indicators can cost you a lot of money. This is especially true during black swan events when price movements can be especially difficult to read. During such times, the market can continuously move in one direction or the other, and no analytical tool can catch it. This is why it is always important to consider other factors and not rely on a single tool.
7. Forget that TA is a game of probability
Technical analysis is not intended to deal with certainty. It is used to handle probability factors. This means that whatever technical methods you use for your strategies, there is no guarantee that the market will behave as you expect. Maybe your analysis shows that there is a very high probability that the market will go up or down, but that is still not a certainty.
You need to take this into account when you are setting up your trading strategies. No matter how experienced you are, you should never think that the market will definitely follow your analysis. If you think like that, you tend to bet too big on one outcome, you are risking a big loss.
8. Blindly following other traders
Continuously improving your technique is essential if you want to master any skill. This is especially true when it comes to trading in the financial markets. In fact, changing market conditions make this a necessity. One of the best ways to learn is to follow technical analysts and experienced traders.
However, if you want to develop sustainably, you also need to find your own strengths and build on them. We can call this your identity, what sets you apart from others as a trader.
If you have read many interviews with successful traders, you will certainly have noticed that they will have quite different strategies. In fact, a strategy that works perfectly for one trader may be completely unworkable by another trader. There are countless ways to profit from the markets. You just need to find out which one suits your personality and trading style best.
Entering a trade based on someone else's analysis may work out a few times. However, if you just blindly follow other traders without understanding the underlying context, it will definitely not work in the long run. Of course, this doesn't mean you shouldn't watch and learn from others. The important thing is whether you agree with someone's trading idea and judge whether it is suitable for your trading system or not. You should not blindly follow other traders, even if they are experienced and reputable.
9. Conclusion
Remember, trading is not easy, and approaching it with a long-term mindset will generally yield better results.
Getting good at trading is a process that takes time. It requires a lot of practice in refining trading strategies and learning to form your own trading ideas. This way, you can find your strengths, identify your weaknesses, and take control of your investment and trading decisions.