Technical analysis is one the most common methods of market analysis and a vital tool for forecasting financial markets. Technical analysis itself is not rocket science by any means and most individuals learn the whole craft pretty quickly, but not everyone can master the art and properly utilize their knowledge to understand the market’s behavior. The following are some of the worst blunders you can make when applying technical analysis in the real world.
Mistake #1: Not controlling your losses
You are in the market not only to make profits but to keep the money you are going to profit from! So preventing, minimizing, and stopping losses is vital for surviving in the game. Using the Stop Loss measure will have huge preventive effects on investors’ losses and is neglected by so many rooky traders. Never forget the simple golden quote by Ed Seykota:
“The elements of good trading are 1, cutting losses. 2, cutting losses. And 3, cutting losses. If you can follow these three rules, you may have a chance”.
Mistake #2: Overtrading
Any investor might contemplate that the more analysis they do and more entry/exit signals they find, the more profits are guaranteed along the way. But extreme behaviors are nefarious, even in financial markets! The fact of the matter is, sometimes doing nothing is the best thing to do.
Overtrading and over-analysis induce unnecessary stress, rob comfort and focus from investors, and increase the number of mistakes drastically. It might come as a shock, but many successful investors might participate in a handful of trades in an entire year and still score incredible wins on their portfolio. Patience is the key element in the success of smart traders, who try their best at ridding themselves of routine distractions and don’t allow their decisions to be affected by market pressure, even if that decision is sitting still and doing nothing.
Mistake #3: Revenge Trading
It might seem like a childish practice but interestingly enough, many traders have engaged in revenge trading and suffered the consequences of losing their temper. Your predictions might be fruitful at a certain period and gain your trust, but what if they suddenly stop being fruitful? Overconfidence in your predictions and the surprise that comes with the resulting defeats lead to such mistakes as revenge trading.
You must accept the bitter fact that predicting the market with %100 accuracy is an impossible expectation and things might go wrong when you least expect them to. Many veteran investors affirm that when the market shows its ugly side to a trader, a chain of unpleasant incidents is triggered and destroys the credibility of technical analysis. In such circumstances, decisions tend to get costlier and more difficult to pull off which leads to frustration, anger, and eventually revenge trading that results in more bad decisions and the vicious cycle is now complete!
To avoid such predicaments, remember that successfully conducting a lucrative deal takes hours of planning, investigating, analyzing, and logical reasoning. When things start to get hairy, break the cycle before it breaks you and take a day off.
Mistake #4: Not letting go of previous perceptions
Investors often have a problem embracing new methods of analysis and prefer sticking to the old strategies based on an outdated perception of the market. In reality, just because you’ve profited from a certain strategy, method, or a set of indicators, doesn’t mean the same success will repeat in other markets as well. This explains why so many people face quick defeat in the cryptocurrency market when they treat it as other financial markets.
Mistake #5: Expecting too much from technical analysis
Even the most accurate forms of technical analysis are nothing more than predictions and might be proven dead wrong. The market is affected by everyday events and news and might change its trajectory from the expected path and disappoint the technicians and their predictions. A professional trader always follows the news and attains his/her information from reliable sources, and always has a plan for risk management to make rational decisions that might contradict the results from technical analysis.
Mistake #6: Relying on other people’s analysis
Consistency of decisions and a healthy level of self-confidence are integral parts of trading psychology. Many investors check their own results with other technicians’. On its own, this is completely fine, but the problem emerges when you prioritize other people’s analysis over yours and lose confidence in your capabilities.
Technical analysis is an art, that’s why the predictions vary among analysts. Even the predictions made by the most successful traders might contradict each other. People who lack confidence and confuse themselves by jumping from one person’s analysis to another often make the worst types of decisions. Unless proven otherwise, don’t be afraid of trusting your own analysis, and remember that at the end of the day, it’s your decision that matters the most.
As stated before, technical analysis is an art and has the potential of transforming a trader’s life, if learned and applied correctly. It takes a lot of time, dedication, and hard work to master it and the learning process never ends, even for crème de la crème of traders and investors. Being a trader is a job for people who are always geared up for the rainy day and don’t fold under pressure and stress; people who have a firm grasp on their emotions and avoid emotional decisions in the market, always seek to improve their knowledge, and learn from other people’s common mistakes and even if they do make mistake, they make brand new ones!