7 Mistakes to Avoid in Technical Analysis

Introduction

Human life is full of mistakes, but a few mistakes cost us more dearly than others. The costliest mistakes are those that we make in our matters of finance. One bad investment decision can incur irreparable harm. Investment in cryptocurrencies is riskier than that in any other market due to its speculative nature and higher volatility. There are two kinds of analysis that you can get help from before investing in the crypto market: technical analysis and fundamental analysis. This article targets seven key mistakes that investors make in doing technical analysis.

What is Technical Analysis?

Technical Analysis refers to studying the price action and trends of the price at which a cryptocurrency is trading at. You need to draw trend lines, find out simple and exponential moving average, study relative strength index (RSI) and look at the volume candles to get an idea whether the buying and selling is weak or powerful. There are also other uncommon indicators. The end purpose is that you try to generalize the historical data, apply it on the current market price and try to predict the future price. Then you take a trade according to the obtained data.

Mistakes in Technical Analysis

Technical analysis is as difficult to learn as it is to master. It is alright to make mistakes, but it is always better to avoid making them as much as possible. The difference between a pro trader and a beginner is that an expert has always a backup plan in case an unexpected situation arises, while a beginner gets emotional and makes wrong decisions.

1.    Not Setting a Stop-Loss Order

No matter how sure you are about your analysis, it is compulsory to put a stop-loss order. You must never become too confident to ignore the unexpected nature of the cryptocurrency market. Instead of eyeing a big profit, your topmost priority must be to protect your capital from draining out. Do not try as much to win as to not lose.

Besides placing an SL, you must try to minimize the risk by opening small orders. If you only risk 1-5% of your wallet, you can be on the safe side provided that you do not use high leverage, which in the first place you should try to avoid altogether.

2.    Trading Too Much (Overtrading)

Many traders mistakenly think that in order to make maximum profit, they need to have an open trade all the time no matter what the condition of the market is. For this to accomplish, they pile up mistakes by relying on lower time frames of the chart. Lower time frames are full of noise, blurring the real picture of the price action. You should try to use larger time frames as much as possible.

When you make it a habit to avoid lower time frames, you will automatically get rid of over trading. Try to understand that sometimes it is profitable just to do nothing. There are plenty of examples of the traders who trade once a quarter, yet they make handsome profits.

3.    Trading to Avenge a Failed Trade

If you get liquidated or suffer a huge loss in trading, it’s natural to be carried away by emotions and open another trade immediately. However, an expert trader ponders over the causes of the failure. They re-visit their analysis and try to find out where their strategy went wrong. There is no trader in the world who has never failed once. Whales admit that no one can beat the market, so there is no use of beating the line.

4.    Being Resistant to Change

The market is not the same every time you trade. When the conditions are different, so should be your strategy. If you understood a few indicators well, and consequently won a trade, it should be no reason for your being sluggish and not do new analysis next time. This applies to the matters intra-trade as well as inter-trade. Within a trade, you might be required to adjust your SL or TP if the market goes against your expectations. Embrace your failures open-heartedly and also the changes that the failures dictate.

5.    Ignoring the TA Killers

Events like a war or an extremely unexpected announcement from the US President can send market to the frantic territories. Such conditions kill even the best technical analysis. Such black swan events may trigger extreme digressions that you may mistakenly interpret as being opportunities.

For instance, the breakout from an inverse head and shoulder pattern accompanied by tall green volume candles attract you open a long position. But you fail to notice the world outside the charts and end up incurring loss. Therefore, technical analysis alone must not be considered a reliable tool.  

6.    Considering TA a Hard and Fast Guideline

Although there are a few strong indicators in the arsenal of technical analysis to find out whether a coin is oversold or overbought, the market sometimes defies all analysis and goes where you might never have expected it to go. It is said that the market is rational, which means that all the historical data is already there in the memory of the market. Since TA extracts data from generalizations of the available data, there is a very high probability that the market may surprise you.

7.    Imitating the Other Traders Blindly

As a beginner, it is not only fair but also advisable to take someone as a mentor. However, as you gain experience, you should try to learn from your own strengths and weaknesses. You can benefit by copying others once or twice, but do not make it a habit to copy others. There is no trader in the world with 100% success ratio. It means every expert trader will fail every now and then. You might prove unfortunate enough to follow a pro trader in their riskiest trade and fail together.

Conclusion

To conclude with, technical analysis is an art that is very useful, but it is also very hard to master. Overconfidence, overtrading, revenge trading, failing to learn from your mistakes, and following the analysts blindly may ruin your trading career.