Table of Contents

• Introduction
• Stop Loss
• Excessive Trading
• Retaliatory Trading
• Being too opinionated
• Ignoring extreme market conditions
• Forgetting that technical analysis is a game of probability
• Blindly following other traders
• Summary

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, be it stocks, forex, gold or cryptocurrencies.

It is not difficult to understand the basic concepts of technical analysis, but it is a profound knowledge to truly master these concepts. When you learn a new skill, you're bound to make a lot of mistakes along the way. When trading or investing, if you are not careful, you will suffer heavy losses. If you are not careful enough and fail to learn from your mistakes, you risk losing a significant portion of your capital. Learning from your mistakes is great, but trying to avoid them is even better.

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 start by learning 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 novices make when trading using technical analysis?

1. Don’t stop losing

Commodity trader Ed Seykota once said this:

“Good trading should have the following elements: (1) stop loss, (2) stop loss, and (3) stop loss. Only by following these three rules will you stand 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 money should always be your number one priority.

Trading can be a daunting task from the start. A sound approach you should consider at this point is this: The first step is not to win, but to not lose. Because of this, it is more advantageous to start with a small position size or not risk real money. Binance Futures, for example, has a testnet that you can use to test your strategies before making real investments. This way you protect your principal and only take risks if they consistently produce good results.

Setting a stop loss is a simple and reasonable approach. Your transaction should have a point of expiration. This is the point where you "suck it up" and admit that your trading strategy is wrong. If you don't apply this mindset to your trading, you'll have a hard time achieving optimal investment performance in the long run. Even just one bad trade can have a very negative impact on your portfolio, and you could end up losing money in the hope that the market recovers.

2. Overtrading

When you become an active trader, a common misconception is that you need Trade frequently. Trading requires a lot of analysis, and many times, it also requires your patience! With some trading strategies, you may have to wait a long time before you get a reliable signal to enter a trade. Some traders may only make less than three trades per year and still achieve great returns.

Jesse Livermore, one of the pioneers of day traders, once said this:

“Making money depends on waiting, not trading. ”

Try to avoid trading purely for the sake of trading. You don't have to trade all the time. In fact, under certain market conditions, it can be more profitable to do nothing and wait for opportunities to arise. This way you protect your principal and have it ready to be deployed should good trading opportunities arise again. The thing to remember is that opportunities come and go, you just have to be patient.

Another similar trading mistake is placing too much emphasis on shorter time frames. Analysis conducted over a longer time frame tends to be more reliable than analysis conducted over a shorter time frame. Therefore, shorter time frames will generate a lot of market noise and may tempt you to enter trades more frequently. While there are many successful scalpers and short-term profitable traders, trading on shorter timeframes often results in a poor risk/reward ratio. Such a high-risk trading strategy is certainly not recommended for novices.

3. Revenge trading

Traders try to make up for it immediately after experiencing heavy losses. common phenomenon. This is what we call "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 small mistakes. But when things go completely wrong, can you remain calm? Can you stick to your original trading plan when everyone is panicking?

Please note the word "analysis" in technical analysis. It naturally refers to taking an analytical approach to the market, right? That being the case, why would you make hasty and emotional decisions? If you want to be the best trader you can be, you should be able to stay calm even if you make a serious mistake. Instead of making emotional decisions, focus on maintaining a logical and analytical mindset.

Trading immediately after a huge loss often leads to even greater losses. As a result, some traders may not trade at all for a period of time after suffering a significant loss. This way, they can have a fresh start and start trading again with a clear head.

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4. Being too opinionated

If you want to be successful As a trader, get used to changing your mind. Market conditions are constantly changing, but one thing is for sure: the biggest constant is change. As a trader, your job is to recognize these changes and adapt to them. A strategy that works very well in one 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 positions are wrong. ”

It’s a good idea to try to see the opposite side of your point of view and see potential weaknesses in it. This way, your investment thesis (and decisions) become more comprehensive.

This also raises another issue: cognitive bias. Bias can seriously influence your decisions, cloud your judgment, and limit the possibilities you consider. Make sure to at least understand the cognitive biases that may be affecting your trading plans so that you can more effectively mitigate their consequences.

5. Ignoring extreme market conditions

Sometimes, the quality of predictions made by technical analysis becomes less Reliable, such as "black swan events" or other extreme market conditions that are largely driven by emotion and mass psychology. Ultimately, markets are driven by supply and demand and can sometimes be extremely imbalanced in one direction or another.

Take the momentum indicator Relative Strength Index (RSI) as an 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 market's momentum is currently determined by sellers. In other words, it just shows that the seller is more powerful than the buyer.

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

Blindly making decisions based on technical tools that achieve extreme readings will cost you dearly. This is especially true during a "black swan event," when price movements can be particularly elusive. During times like these, the market may continue to move in one direction or another, and no analytical tool can stop it. That’s why it’s important to consider other factors as well and not just rely on a single tool.

6. Forget that technical analysis is a game of probability

Technical analysis is not absolute, but only probability. This means that no matter what technical approach your strategy is based on, there is no guarantee that the market will behave as you expect. Maybe your analysis shows that there's a good chance the market will go up or down, but that's not guaranteed to happen either.

You need to take this into consideration when developing your trading strategy. No matter how experienced you are, you can never expect the market to develop the way you analyze it. Otherwise, you can easily go all-in and suffer huge financial losses.

7. Blindly following other traders

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

However, if you want to consistently perform well, you need to find your strengths and capitalize on them. This is your advantage and what sets you apart from other traders.

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

Trading based on other people's analysis may occasionally be successful. However, if you just blindly follow other traders without understanding the basic situation, then this method will definitely not last long. Of course, this doesn’t mean you shouldn’t follow and learn from others. The point is whether you agree with this trading concept and whether it fits your trading system. Even if they are experienced and reputable traders, you should not blindly follow them.

Summary

We have discussed some of the most basic mistakes that should be avoided when using technical analysis. Remember, trading is not easy, and maintaining a longer-term mentality is the long-term feasible method.

If you want to have sustained excellent trading performance, you need to practice for a long time. It takes a lot of practice to perfect your trading strategy and learn how to develop your own trading philosophy. This way, you can find your strengths, discover your weaknesses, and take control of your investing and trading decisions.

If you want to know more about chart analysis, please read "12 Popular K-line Chart Patterns Used in Technical Analysis".