7 Common Mistakes in Technical Analysis (TA)

Table of Contents

• Content

• Introduction

  • 1. Not cutting your losses

  • 2. Overtrading

  • 3. Revenge trading

  • 4. Being too stubborn to change your mind

  • 5. Ignoring extreme market conditions

  • 6. Forgetting that TA is a game of probabilities

  • 7. Blindly following other traders

• Conclusion

• FAQ

• You May Also Like

• External Links

Introduction

One of the most popular approaches to analyzing the financial markets is known as technical analysis, or TA. The use of TA is possible in almost every kind of financial market, including stocks, FX, gold, and cryptocurrencies, among others.

Although it is not too difficult to understand the fundamental ideas behind technical analysis, becoming an expert in this field is rather challenging. It's certain that you'll blunder your way through the process of acquiring any new talent, so you may as well get used to it. When it comes to trading or investing, this may be very detrimental to your success. You run the danger of losing a significant chunk of your wealth if you do not exercise caution and make an effort to gain knowledge from your past errors. It's a good idea to gain wisdom from your past errors, but getting as far away from them is much smarter.

You will get familiar with some of the most common errors made in technical analysis as you read this article. If you are new to trading, why not become familiar with some of the fundamentals of technical analysis first? Read our article on "What Is Technical Analysis?" to learn more. and the 5 core indicators necessary for Conducting Technical Analysis.

When it comes to trading using technical analysis, what are the most common errors that novice traders make?

1. Not cutting your losses

Let's begin with a quotation from Ed Seykota, who is involved in the trading of commodities:

"The components of successful trading are, in order of importance, (1) minimizing losses, (2) minimizing losses, and (3) minimizing losses. If you are able to comply with these three guidelines, there is a possibility that you may be successful.

Even though this seems to be a straightforward step, it is critical that its significance be emphasized at all times. Protecting your financial resources should always be your first concern when it comes to financial activities like trading and investing.

Trading for the first time may be a very nerve-wracking experience. When you're just getting started, a good strategy to keep in mind is that the first thing you should focus on is preventing failure rather than achieving success. For this reason, it may be beneficial to begin trading with a lower position size, or perhaps to not risk any actual cash at all. For instance, you may practice your trading techniques on the testnet provided by Binance Futures before putting any of your hard-earned money at risk. With this strategy, you could keep your money safe and only put it at risk after you've shown that you can consistently bring in money.

Establishing a loss limit is sound business practice. Each of your deals needs to have a point when they become invalid. This is the point at which you have to "take the medicine" and admit that your trading plan was flawed. If you do not approach trading with this frame of mind, it is probable that you will not do well throughout the course of a trading career. Even just one poor move may damage your portfolio, and you may wind up having to hang on to lost positions while you wait for the market to get better.

2. Overtrading

When you are engaged in active trading, it is a frequent misunderstanding that you must constantly be in a transaction. Trading requires a significant amount of study as well as a significant amount of "sitting about" and patiently waiting. When using some trading tactics, you may be required to hold off on entering a trade until you get a signal that can be trusted. Even if they only do three deals a year, some traders may still make a lot of money from their investments.

Make it a point to steer clear of engaging in a transaction for the sole purpose of doing so. You are not required to engage in a transaction at all times. In some situations, doing nothing and waiting for an opportunity to reveal itself might actually be more lucrative than acting in response to the situation. Your investment will be protected in this manner, and you will be able to quickly put it to use if profitable trading opportunities become available again. You simply have to be patient and remember that chances will always present themselves again; all you have to do is wait for them.

An error that is similar in nature when it comes to trading is placing an excessive focus on smaller time periods. As a rule, analysis carried out on longer time periods will provide more trustworthy results than analysis carried out on shorter time spans. As a result, short time frames will generate a lot of market noise, which may encourage you to initiate trades more often than you would otherwise. Trading on smaller time frames often results in a poor risk-to-reward ratio. This is not to say that there aren't some profitable scalpers or short-term traders; there just aren't as many of them. Because it is such a high-risk trading method, it is not recommended for traders just starting out.

3. Revenge trading

It is not unusual to see traders attempting to make up for a huge loss they have incurred instantly. This practice is referred to as "revenge trading." It makes no difference whether you want to be a technical analyst, a day trader, or a swing trader; the most important thing is to refrain from making judgments based on your emotions.

It is not difficult to maintain your composure when things are going well, or even when you make little errors. But are you able to maintain your composure even when everything seems to be going wrong? Are you able to remain disciplined and follow your trading strategy even while everyone else is freaking out?

It is important to note the term "analysis" in the phrase "technical analysis." This, of course, calls for a methodical approach to trading in the markets, doesn't it? Therefore, why would you want to make quick judgments based on your emotions inside the confines of such a framework? If you want to be included among the finest traders, you need to be able to maintain your composure even after making the most significant errors. Try not to make decisions based on how you feel. Instead, try to keep a clear head and think things through.

Trading right after experiencing a significant loss is often a recipe for much bigger losses in the future. As a consequence of this, some traders may choose to not trade at all for a certain amount of time after suffering a significant loss. They will be able to begin trading once again with a clear head and a clean slate thanks to this solution.

4. Being too stubborn to change your mind

If you want to become a good trader, you can't be scared to shift your viewpoint when necessary. A lot. One thing that can be said with absolute confidence is that market circumstances may change very fast. They are always subject to change. As a trader, you are responsible for identifying these shifts and adjusting your strategy accordingly. It's possible that a business approach that does incredibly well in one market setting may be completely ineffective in another.

Let's have a look at what the illustrious trader Paul Tudor Jones had to say about his holdings:

"I operate on the assumption that every viewpoint I have is incorrect," you said.

It's a useful exercise to put yourself in the position of the opposing side of your arguments in order to see probable flaws in their reasoning. If you keep going in this way, your investing theses (and conclusions) may become more complete.

This brings up yet another important issue, which is cognitive biases. Your preconceived notions may significantly impact the decisions you make, cloud your judgment, and restrict the range of options you can take into consideration. You should make it a priority to at least learn about the cognitive biases that may affect your trading strategies. This will help you be better able to fight against their bad effects.

5. Ignoring extreme market conditions

There are instances in which the predictive capacities of TA are not as dependable as they formerly were. These may be black swan occurrences or other sorts of extraordinary market situations that are mainly influenced by people's emotions and the psychology of the masses. In the end, supply and demand are what drive the markets, and there are times when one of those factors is very out of whack relative to the other.

Take, for instance, the Relative Strength Index (RSI), an example of momentum indicator. In general, if the reading is lower than 30, the asset being tracked may be seen as having been oversold. When the RSI drops below 30, does this suggest that it is an indication that a transaction should be made immediately? Never in a million years! Simply said, it means that the selling side of the market is now in control of the momentum of the market. To put it another way, it simply suggests that there is more power in the hands of sellers than purchasers.

When unusual market circumstances exist, the RSI has the potential to reach high values. It is even feasible that it will go into the single digits, which is quite close to the absolute minimum reading (zero). Even such a strong sign of being oversold doesn't always mean that the market is about to turn around.

If you rely on the extreme readings that your technological equipment provides, you might end up losing a significant amount of money. This is particularly true during black swan situations, when it may be quite difficult to predict what the price action will do. When conditions are as they are right now, no analytical instrument can stop the markets from continuing in whichever direction they are currently moving. Because of this, it is important to constantly take into account other aspects as well, and not to depend just on a single instrument.

6. Forgetting that TA is a game of probabilities

The analyses that are performed using technical methods do not deal with absolutes. Probabilities are the subject of this discussion. This indicates that there is never a guarantee that the market will react in the way you anticipate, regardless of the technical approach you base your plans on. Even if your research indicates that there is a very high possibility of the market going up or down, nothing can be said with absolute confidence about the direction in which it will move.

When formulating your trading strategy, you really must remember to take this into consideration. It is never a good idea to expect that the market will follow your analysis, regardless of how much expertise you have in the financial markets. If you do so, you risk oversizing your bets and putting too much on a single event, which might result in a significant loss of money.

7. Blindly following other traders

If you want to become an expert in any field, it is imperative that you are always working to improve your skills. When it comes to trading in the financial markets, this is very important to keep in mind. In point of fact, the shifting circumstances of the market make it an absolute must. One of the best ways to learn is to look at how experienced technical analysts and traders do things.

To become consistently excellent, you will need first to identify your own talents and then build upon those abilities. If you want to achieve this goal, you must first uncover your own strengths. We might refer to this as your edge, which is the quality that sets you apart from other traders in the market.

If you read a lot of interviews with great traders, you'll quickly realize that each one uses a very unique set of tactics to achieve their goals. In fact, a trading technique that works faultlessly for one dealer might be seen as totally impractical by another. There are an almost infinite number of methods to make money off of market activity. You only need to figure out which one complements your character and the way you trade the most effectively.

The decision to enter into a transaction based on the analysis of another person could sometimes be profitable. On the other hand, if you just copy the actions of other traders without making an effort to comprehend the bigger picture, you should not expect this strategy to be successful over the long run. This, of course, does not imply that you should not follow the examples of others or gain knowledge from them. The most crucial thing to consider is whether or not you agree with the trade concept and whether or not it is compatible with your trading strategy. Even though other traders are knowledgeable and have a good reputation, you shouldn't just mindlessly follow in their footsteps.

Conclusion

When it comes to technical analysis, we went over some of the most basic errors you should try to avoid making. Keep in mind that trading is not a simple endeavor; generally, it is more viable to approach it with a longer-term perspective.

Learning how to trade successfully on a constant basis is a process that requires time. Developing your own trading methods and learning how to come up with your own ideas for trades involves a significant amount of experience. You'll have a better understanding of your capabilities, be able to pinpoint any areas in which you fall short, and ultimately feel more in command of the choices you make about investments and trades.

FAQ

What is TA in technical analysis?

Stock charts are used in technical analysis so that the behaviors of market players may be visually represented. Within the charts, patterns develop, and recognizing these patterns may assist a trader in locating potential trading opportunities. TA functions at its highest potential when we keep a few key assumptions in mind. Technical analysis is more useful for determining short-term transactions.

What are the major issues to consider in technical analysis?

Switching from one method or technique to another is an example of one of the most significant issues that may arise in technical analysis, which is known as "system hopping." Traders engage in such behavior because they are unable to generate a profit with a single trading technique. The old saying is that "practice makes perfect." You've probably heard of this proverb; however, merchants rarely follow it in practice.

What is a drawback to technical analysis?

Technical analysis does not consider the fundamentals specific to particular stocks or the stock market as a whole. All of the significant economic announcements, company reports, and outside events are completely ignored. Important factors may drive the long-term and short-term volatility of the markets.

That's all for today, see ya tomorrow! If you want more, be sure to follow our Twitter (@croxroadnews)

DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.

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External Links

1. Technical Analysis: 7 Common Mistakes To Look Out For

2. 7 Common Mistakes in Technical Analysis (TA) | Binance Academy

3. TECHNICAL ANALYSIS OF STOCKS: UNDERSTAND THE PROS AND CONS

4. How to perform technical analysis (2022): Beginners guide

5. Problems in Technical Analysis and How to Overcome Them