7 Common Mistakes Made in Technical Analysis (TA)

In this article, we will talk about 7 Common Mistakes Made in Technical Analysis (TA). If you are new to trading, we recommend learning the basics of technical analysis.

Technical Analysis (TA) is one of the most common methods used to analyze financial markets. TA can be applied to all types of financial markets such as stocks, forex, gold or cryptocurrencies.

While the basic concepts of technical analysis are relatively easy to understand, mastering the subject is quite difficult. Naturally, many mistakes are made while learning a new skill. But when it comes to trading or investing, these mistakes can be particularly damaging. If you are not careful and do not learn from your mistakes, you risk losing a significant portion of your capital. It is important to learn from mistakes, but it is even more important to avoid mistakes as much as possible.

7 Common Mistakes Made in Technical Analysis

1. Not cutting your lossesclear

Let’s start with a quote from commodity trader Ed Seykota:

“The elements of good trades are: (1) reducing losses, (2) reducing losses, and (3) reducing losses. If you follow these three rules, you may have a chance.”

This may seem like a simple step, but its importance should be emphasized. When it comes to trading and investing, protecting your capital should always be your top priority.

Getting started with trading can be a challenging undertaking. When you’re just getting started, you can take this powerful approach: the first step is not to win, but not to lose. It is therefore better to start with a smaller position size and not even risk real funds. For example, Binance Futures has a testnet where you can test your strategies before risking your funds. This way you can protect your capital and only risk it after you start seeing consistently good results.

Arranging a stop-loss means acting sensibly. Your trades must have a void point. This is the point at which you “accept the situation” and admit that your trading idea was wrong. If you don’t apply this perspective to your trading, you probably won’t be successful in the long run. Even one bad trade can be very damaging to your portfolio, and you may be left with a losing portfolio in the hope that the market will recover.

2. Overtrading

It is a common mistake to think that when you are actively trading, you should always be trading. Trading requires a lot of analysis, and indeed, most of the time, sitting and waiting patiently. With some trading strategies, you may have to wait a long time before you can get a reliable signal to enter a trade. Some traders make fewer than three trades per year and still have very successful results.

Jesse Livermore, one of the pioneers of day trading, says:

“Money is made by sitting, not by trading.”

Avoid entering a trade just to have entered. You don’t always have to be in a transaction. In fact, in some market conditions, it is more profitable to do nothing and wait for an opportunity to appear. This way you protect your capital and keep it ready for use when a good trading opportunity arises again. You have to keep in mind that opportunities will always reappear, you just have to wait for them.

A similar trading mistake is to place too much emphasis on short timeframes. Analyzes for larger time periods are generally more reliable than those for shorter time periods. Therefore, short timeframes will contain a high amount of market noise and will lead you to enter trades more often. While there are many traders who are successful in instant and short-term trades, trading on short timeframes often presents a poor risk/return ratio. It is not recommended for beginners as this is a risky trading strategy.

3. Revenge trading

It is often possible to come across traders trying to make up for their losses immediately after a significant loss. This is called revenge trading. Regardless of whether you want to be a technical analyst, a day trader or a floating trader, it is very important to avoid emotional decisions.
It’s easy to stay calm when things are going well and even when minor mistakes are made. But can you keep your cool when things go completely wrong? Can you stick to your trading plan even when everyone else is in a panic?

Pay attention to the word “analysis” in technical analysis. Naturally, this word means an analytical approach to the markets, right? So why would you want to make hasty, emotional decisions within such a framework? If you want to be one of the most successful traders, you must be able to stay calm even after the biggest mistakes. Avoid emotional decisions and focus on keeping your logical, analytical point of view.

Trading immediately after a big loss tends to result in more losses. Therefore, some traders may even choose not to trade at all for a certain period of time after a large loss. This way, you can start fresh and come back to trading with a clear mind.

4. Being too stubborn to change your mind

If you want to be a successful investor, don’t be afraid to change your mind and do it often. Market conditions can change rapidly, and one thing is certain: market conditions will continue to change. Your job as an investor is to notice these changes and adapt to them. A strategy that performs really well in one market condition may not work at all in another.
Legendary investor Paul Tudor Jones had this to say about his positions:

“Every day I assume that all the positions I hold are wrong.”

It is the right approach to reflect on the counter-arguments so that you can see the potential weaknesses of your argument. This way, your investment thesis (and decisions) can become more comprehensive.

This brings up another point: cognitive biases. Biases can severely affect your decision-making processes, cloud your decisions, and limit the number of possibilities you can consider. At the very least, you can make sure you understand the cognitive biases that may affect your trading plans so you can more effectively avoid the consequences of those biases.

5. Ignoring extreme market conditions

In some cases, the predictive features of technical analysis become less reliable. These situations may be black swan events or other unusual market conditions linked to sentimentality and mass psychology. Ultimately, markets are shaped by supply and demand, and when one side is too predominant, there can be a huge imbalance.

Let’s take the example of the Relative Strength Index (RSI), a momentum indicator. Generally, if the RSI value is below 30, the charted asset is considered oversold. So, does this give a buy and sell signal as soon as the RSI drops below 30? No way! It simply means that the momentum of the market is determined by the sellers. In other words, it only shows that sellers are stronger than buyers.

RSI can reach extreme levels in unusual market conditions. It can even drop to single digits, approaching the lowest possible value (zero). Even such an extreme oversold value does not indicate an immediate trend change.

Blindly making decisions on technical tool values ​​that reach extreme values ​​can cost you large sums of money. This is especially true during black swan events when price action is extremely difficult to read. At times like these, the market can keep going in one direction and no analytical tool can stop it. That’s why it’s important not to use just one tool and to consider other factors as well.

6. Forgetting that TA is a game of probabilities

Technical analysis does not reveal precise information. It only offers possibilities. This means that no matter what technical approach you use to strategize, there is no guarantee that the market will move as you expect. Perhaps your analysis indicates that the market will likely move up or down, but this is still not certain.

You need to take this into account when determining your trading strategies. It’s never a good idea to think that the market will follow your analysis, regardless of how experienced you are. If you do, you become vulnerable to taking an overly large position and putting too much money into a single outcome, risking a huge financial loss.

7. Blindly following other traders

If you want to master any skill, you need to constantly improve your skills. This is especially true for trading in financial markets. In fact, changing markets make this a necessity. One of the best ways to learn is to follow experienced technical analysts and traders.

But you also need to discover your own strengths and start building on them if you want to be consistently successful. As a trader, we can call this your superior aspects that make you different from others.

If you read the interviews of successful investors, you may realize that they have quite different strategies. In fact, a strategy that works so well for one person may seem completely impossible to implement for another. 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 someone else’s analysis may work several times. But if you blindly follow other investors without understanding the underlying context, it certainly won’t work in the long run. The important point is whether you agree with the trading idea and whether it fits your trading system. You should not blindly follow other investors, even if they are experienced and reputable.

Closing thoughts

We have mentioned some basic mistakes that you should avoid when using technical analysis. Remember, trading is not easy and it is often more feasible to approach trading from a longer-term perspective.

Being consistently successful in trading is a time-consuming process. It takes a lot of practice and learning how to come up with your own trading ideas to make your trading strategies even better. In this way, you can discover your strengths, identify your weaknesses, and be in control of your investment and trading decisions.

This is where our article 7 Common Mistakes Made in Technical Analysis ends. Thank you for reading.

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