Contents

  • Introduction

  • Don't take your losses

  • Overtrading

  • Revenge trading

  • Being too stubborn to change your mind

  • Ignoring extreme market conditions

  • Forgetting that AT is a game of probabilities

  • Blindly follow other traders

  • To conclude


Introduction

Technical analysis (TA) is one of the most used ways to analyze financial markets. AT can be applied to any financial market, whether stocks, forex, gold or cryptocurrencies.

Although the basic concepts of technical analysis are relatively easy to grasp, it is a difficult art to master. When you learn new skills, it's natural to make a lot of mistakes as you progress. This can be particularly detrimental when it comes to trading or investing. If you are not careful and do not learn from your mistakes, you risk losing a significant part of your capital. Learning from your mistakes is good, but avoiding them as much as possible is even better.

This article will introduce you to some of the most common mistakes in technical analysis. If you're new to trading, why not start by studying the basics of technical analysis? Consult our article What is technical analysis? and 5 Essential Indicators Used in Technical Analysis.

So, what are the most common mistakes beginners make when trading with technical analysis?


1. Don't take your losses

Let's start with a quote from commodities trader Ed Seykota:

“The basics of good trading are: (1) knowing how to take your losses, (2) knowing how to take your losses, (3) and knowing how to take your losses. If you can follow these three rules, you might have a chance. »

It seems like a simple thing, but it is always good to emphasize its importance. When it comes to trading and investing, protecting your capital should always be your number one priority.

Getting started in trading can be a daunting experience. A solid approach to consider when starting out is: The first step is not to win, but not to lose. This is why it may be better to start with a smaller position size, or even not risk any real funds. Binance Futures, for example, has a testnet where you can test your strategies before risking your hard-earned funds. This way you can protect your capital and only risk it when you consistently achieve good results.

Defining a Stop-loss is a simple concrete measure. Your trades must have an invalidation point. This is when you “take the bull by the horns” and accept that your trade idea was bad. If you don't apply this mindset to your trading, you probably won't do well in the long run. Even a bad trade can be very damaging to your portfolio, and you may be left holding a losing position, hoping that the market will recover.


2. Overtrading

When you are an active trader, it is easy to think that you must always be in a trade. Trading involves a lot of analysis and a lot of waiting! With some trading strategies, you may have to wait a long time to get a reliable signal to enter a trade. Some traders can make fewer than three trades per year and still achieve exceptional returns.

Check out this quote from trader Jesse Livermore, one of the pioneers of day trading:

"L'argent se gagne en restant assis, pas en tradant »

Try to avoid entering a trade for the sake of it. You don't need to always be in a trade. In fact, in certain market conditions it is more profitable to do nothing and wait for an opportunity to present itself. This way you preserve your capital and have it available when good trading opportunities arise again. It's good to keep in mind that opportunities will always come back, you just have to wait for them.

A similar trading mistake is placing too much emphasis on lower time horizons. Analysis performed over longer time periods will generally be more reliable than analysis performed over shorter time periods. So, lower time horizons produce a lot of noise in the market and may tempt you to enter trades more often. Although there are many profitable scalpers and short-term traders, trading on lower time horizons generally has a poor risk/reward ratio. Being a risky trading strategy, it is definitely not recommended for beginners.


3. Le Revenge trading

It is quite common to see traders trying to immediately recover a significant loss. 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're making small mistakes. But can you stay calm when things go wrong? Can you stick to your trading plan even when everyone is panicking?

Notice the word “analysis” in technical analysis. Naturally, this involves an analytical approach to markets, right? So why would you want to make hasty and emotional decisions in such a setting? If you want to be among the best traders, you should be able to stay calm even after the biggest mistakes. Avoid emotional decisions and keep a logical and analytical mind.

Trading immediately after suffering a large loss tends to result in even more losses. So some traders may not even trade at all for a while after a big loss. This way, they can get a fresh start and return to trading with a clear mind.


Do you want to get started with cryptocurrencies? Buy Bitcoin on Binance!


4. Being too stubborn to change your mind

If you want to become a successful trader, don't be afraid to change your mind, even often. Market conditions can change very quickly, and one thing is certain. They will continue to change. Your job as a trader is to recognize these changes and adapt to them. A strategy that works really well in one specific market environment may not work at all in another.

Let's see what legendary trader Paul Tudor Jones has to say about his positions:

“Every day I assume that every position I have is bad. »

It's a good practice to try to take the other side of your arguments to see their potential weaknesses. This way, your investments (and your decisions) can become safer.

This also raises another point: cognitive biases. Biases can seriously affect your decision-making, clouding your judgment and limiting the range of possibilities you are able to consider. Make sure you at least understand the cognitive biases that can affect your trading plans, so you can mitigate the consequences more effectively.


5. Ignoring extreme market conditions

There are times when the predictive qualities of AT become less reliable. These can be Black Swan events or other types of extreme market conditions driven heavily by emotion and mass psychology. Ultimately, markets are driven by supply and demand, and sometimes they can be extremely unbalanced on one side.

Take the example of the Relative Strength Index (RSI), an inertia indicator. In general, if it is below 30, the chart asset can be considered oversold. Does this mean it is an immediate trading signal when the RSI is below 30? Absolutely not ! This simply means that market inertia is currently being imposed by sellers. In other words, it simply indicates that sellers are stronger than buyers.

The RSI can reach extreme levels during extraordinary market conditions. It could even drop to a single digit, close to the lowest possible value (zero). Even such an extremely oversold stock does not necessarily mean a reversal is imminent.


Blindly making decisions based on technical tools reaching extreme values ​​can cause you to lose a lot of money. This is especially true during Black Swan events, when price action can be exceptionally difficult to read. In times like this, markets can continue to move in one direction or the other, and no analytical tool will be able to stop them. This is why it is always important to consider other factors and not rely on just one tool.


6. Forgetting that AT is a game of probabilities

Technical analysis does not deal in absolutes. It deals with probabilities. This means that no matter what technical approach you base your strategies on, there is never a guarantee that the market will behave the way you imagine. Your analysis may suggest that there is a very high probability that the market will move up or down, but it is not a certainty.

You should take this into account when setting your trading strategies. No matter how experienced you are, it is never a great idea to think that the market will follow your analysis. If you do this, you tend to overestimate and bet too big on a single outcome, risking a big financial loss.


7. Blindly following other traders

It is essential to constantly improve your know-how if you want to master a skill. This is especially true when it comes to trading the financial markets. In fact, changing market conditions make it a necessity. One of the best ways to learn is to follow experienced technical analysts and traders.

However, if you want to improve your results in the long term, you must also find your own strengths and exploit them. This is called your advantage, what sets you apart from others as a trader.

If you read many interviews with successful traders, you will surely notice that they have very different strategies. In fact, a strategy that is perfectly suited to one trader may be considered completely unpredictable by another trader. There are countless ways to profit from the markets. You just need to find the one that best suits your personality and trading style.

Entering a trade based on another person's analysis can work many times. However, if you just follow other traders blindly and without understanding the underlying context, it will definitely not work in the long run. This doesn't mean you shouldn't follow and learn from others. The important thing is whether you agree with the idea behind the trade and whether it fits into your trading system. You should not blindly follow other traders, even if they are experienced and reputable.


To conclude

We have outlined some of the most basic mistakes to avoid when engaging in technical analysis. Remember, trading isn't easy, and it's generally easier to approach as a long-term trader.

Consistently making winning trades is a process that takes time. It takes a lot of practice to refine your trading strategies and learn to formulate your own trading ideas. This way you can find your strengths, identify your weaknesses and control your investment and trading decisions.

If you want to learn more about chart analysis, check out 12 popular candlestick patterns used in technical analysis.