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Introduction
Introduction
Technical Analysis (Technical Analysis) is a commonly used method of financial market analysis. Technical analysis can be applied to almost any financial market, whether it is the stock market, foreign exchange market, gold market or cryptocurrency market.
The basic concepts of technical analysis are easy to understand, but it is a profound art. When youre learning any new skill, its normal to make mistakes along the way, but when it comes to trading or investing, it can be costly. If you are not cautious or reflective enough, your capital can evaporate overnight at any time. Learning from mistakes is a good thing, but avoid errors of judgment as much as possible.
So, what are the common technical analysis mistakes that novices make in the trading process?
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1. Failure to stop losses in time
Here is a quote from commodity trader Ed. Seykota: The elements of good trading are, (1) reduce losses, (2) reduce losses, (3) reduce losses. If you can follow these three principles, you have a chance of winning .”
Seems like a simple step, but its importance cannot be ignored. When it comes to trading and investing, protecting your funds is the number one priority.
Setting a timely stop loss is simple and rational. A trade should have a termination condition: when you bite the bullet and accept that your trade idea is wrong. If you dont have this kind of trading mentality in the trading process, it will be difficult for you to win in long-term trading. A failed transaction may have a great impact on your portfolio investment. In the end, you may end up empty-handed and can only hope that the market will return to normal.
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2. Overtrading
If you are an active trader, a common mistake is that you want to be on every trade. Trading involves a lot of analysis, please formulate a strategy and wait patiently! Many trading strategies need to wait for reliable trading signals to appear before entering the market. Some traders can take a few trades throughout the year and still make good returns.
Dont trade for the sake of trading. You dont always need to be involved in every transaction center. In fact, in some market situations, doing nothing and waiting for good trading opportunities is the best option.
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3. Retaliatory transactions
A very common phenomenon is that traders try to recover more losses in a short period of time, which is what we call retaliatory trading. This has nothing to do with whether you want to be a technical analyst, a day trader or a swing trader, the key is to avoid being dominated by emotions in the trading process.
Its easy to keep calm when everything goes well in a deal, or when a tiny error occurs. But how can you stay calm when things get completely out of hand? Can you stick to your trading plan, even when everyone starts panicking?
Note the analysis in technical analysis. This emphasizes the importance of analytical methods in the market. So why act rashly and let that emotional decision control you?
After taking a big loss on a trade soon, more losses are likely to follow. As a result, some traders, after taking huge losses, and possibly not trading at all for a period of time, will start over and sort things out.
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4. Be opinionated
If you want to be a successful trader, dont be afraid to change your mind. Market conditions are unpredictable, but one thing that remains constant is that markets are dynamic. Recognizing change and adapting to it is part of being a trader. A strategy can be very effective in certain market conditions, but not all situations.
Lets take a look at the trading attitude of legendary trader Paul Tudor Jones: Every day I assume that my trading strategy is wrong.
This also raises another issue: cognitive biases. Biases can seriously affect your decision-making, mislead your judgment, and limit the space for your consideration. Make sure you understand how cognitive biases can affect your trading plan so you can limit losses more effectively.
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5. Ignoring extreme market conditions
Forecasts from technical analysis may sometimes be unreliable. Black swan events or other extreme market situations are likely to occur when the market is driven by emotions and mass psychology. Ultimately, the market is determined by supply and demand, but sometimes the balance between supply and demand can be disrupted.
Take the example of the Relative Strength Index (RSI), also known as the momentum indicator. Generally speaking, when the index is below 30, the asset shown on the chart may be short-selling. So when the momentum indicator is below 30, does it mean that it is time to trade? of course not! This can only mean that the current sellers have more momentum. In other words, the seller has an advantage over the buyer.
Blind choices made by relying on extreme indices derived from technical tools can result in huge losses. In particular, price fluctuations during black swan events are difficult to predict. In this case, the market may remain in a trend, and no analytical tool can stop the market from developing. Thats why its so important to consider multiple factors, rather than relying on a single tool.
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6. Technical analysis is just a game of probability
So when you make a trading strategy, you need to understand that probability does not mean absolute. No matter how experienced you are, you cannot assume that the market will necessarily follow your analysis. If you are overconfident, you may take too large a position, invest too much, and take more risks.
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7. Blindly following other traders
If you want to be proficient in a certain technology, continuous polishing of skills is the key point, especially in financial market transactions. In fact, this skill is necessary in an ever-changing marketplace. One of the best ways to learn is from experienced technical analysts and traders.
However, if you want to stay ahead of the market, you need to find what works for you and keep improving. We call it an edge, and its what sets you apart from other traders.
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epilogue
epilogueWe talked about the basic mistakes you should avoid when using technical analysis.
Remember, trading is not easy and should be approached with a long-term mindset.Staying at the forefront of trading takes time.
