XEX Research Institute Trading Review: 7 Common Mistakes in Technical Analysis (TA)

Technical analysis (TA) is one of the most commonly used methods in the financial markets. It can be applied to almost any market, whether it is stocks, foreign exchange, gold, or cryptocurrencies. It is not difficult to understand the basic concepts of technical analysis, but it is not easy to truly master it.

When learning any new skill, mistakes are inevitable. In trading or investing, even a small mistake can lead to serious losses. If you are not careful enough or fail to learn from your mistakes, the losses will be even greater. While it is good to learn from your mistakes, it is obviously a better strategy to try to avoid making mistakes.

This article will introduce some of the most common mistakes in technical analysis. For novice traders, it is recommended to first master some basic knowledge of technical analysis, such as What is Technical Analysis? and Five Basic Indicators in Technical Analysis. So, what are the most common mistakes that novices make when using technical analysis for trading?

1. No stop loss

Commodity trader Ed Seykota once famously said, “Good trading consists of three elements: (1) stop, (2) stop, and (3) stop.” While it may sound simple, its importance cannot be overstated. When it comes to trading and investing, protecting your capital should always be your top priority.

Trading is inherently challenging, so the first step is not to pursue profits, but to avoid losses. A wise strategy is to start with a small position or use a virtual account for testing. For example, the Binance Futures platform provides a testnet that you can use to verify your strategy and ensure that you do not risk losing your principal before achieving consistent and stable profits.

Setting a stop loss is a reasonable step to ensure the safety of your funds. Every trade should have a failure point, which allows you to admit your mistake and exit the market in time. If you dont adopt this mentality, your long-term investment performance will be difficult to achieve. A bad trade can have a very negative impact on your portfolio and even cause you to suffer significant losses due to market fluctuations.

2. Overtrading

Once they become active traders, many people tend to fall into the trap of trading too frequently. However, trading requires not only in-depth analysis, but also a lot of patience. Certain strategies may require a long wait before a reliable entry signal is obtained. Some traders even make only a few trades per year and still get good returns.

Day trading pioneer Jesse Livermore said, You make money by waiting, not by trading. Dont rush into a trade because youre eager to trade. In fact, in some market conditions, its wiser to do nothing and wait patiently. With this strategy, you can protect your capital and be able to seize opportunities quickly when they come.

Another common mistake is to over-rely on shorter timeframe analysis. In comparison, longer timeframe analysis is usually more reliable. Shorter timeframes tend to produce a lot of market noise and may tempt you to trade too frequently. While there are successful short-term traders, short timeframes generally offer a poor risk-reward ratio. Therefore, as a beginner, try to avoid over-reliance on short-term trading strategies.

3. Revenge Trading

After experiencing a significant loss, it is a common reaction for many traders to try to recover the loss by trading immediately. This is known as revenge trading. Whether you are a technical analyst, day trader, or swing trader, it is vital to avoid emotional decision making.

Its not difficult to stay calm, especially when things are going well or when there are not many mistakes. But when the situation is completely unfavorable, can you still stick to your original trading plan? The core of technical analysis is analysis, which means taking a calm and analytical attitude instead of impulsive decision-making.

Trading immediately after a big loss usually leads to even bigger losses, so some traders choose to temporarily exit the market after a big mistake until they can re-enter the market with a clear mind.

4. Being stubborn

Being a successful trader means you must learn to be flexible. Market conditions change rapidly, but the only constant is change. As a trader, it is your job to identify these changes and adapt to them. A strategy that works well in one market environment may be completely ineffective in another.

Legendary trader Paul Tudor Jones once said, “Every day I assume that my position is wrong.” This means that it is healthy to reflect on your own views and identify potential weaknesses in them. It helps you see the big picture and improve your decision-making.

This also brings up the issue of cognitive biases. Biases can seriously affect your decision-making, cloud your judgment, and limit your possibilities. Understanding common cognitive biases and learning to mitigate their effects is key to improving your trading skills.

5. Ignoring extreme market conditions

Sometimes the effectiveness of technical analysis can be compromised during extreme market conditions, especially during “black swan events” or other periods of market activity dominated by emotion. Ultimately, markets are driven by supply and demand, and sometimes that balance can be extremely tilted.

For example, the Relative Strength Index (RSI) is often seen as an oversold asset when it is below 30. However, this does not mean that an RSI below 30 is an immediate signal to buy. It just indicates that the current market is dominated by sellers. In extreme market conditions, the RSI may even reach extreme levels close to zero, but this does not necessarily mean that prices are about to reverse.

Blindly relying on extreme readings of technical indicators can lead to significant losses, especially during black swan events. When the market shows extreme movements, any analysis tool may fail. Therefore, it is important to consider other factors and not just rely on a single technical tool.

6. Forget that technical analysis is a game of probability

Technical analysis is not an absolute, but a game of probability. This means that no matter what technical method your strategy is based on, there is no guarantee that the market will develop as you expect. Even if your analysis shows that the market is more likely to rise or fall, this is not a sure thing.

Therefore, you need to take this into account when developing a trading strategy. No matter how experienced you are in trading, you should not blindly trust that the market will work the way you expect it to. Otherwise, you may over-bet and end up with huge losses.

7. Blindly following other traders

If you want to succeed in the market, you must constantly improve your skills. In a constantly changing market, it is essential to upgrade your skills. And one of the best ways to learn is to learn from experienced technical analysts and traders.

However, to stand out in the market, you need to find and exploit your strengths. Every successful trader has his or her own unique strategy, which may not work for everyone. Trading based on someone elses analysis may be successful occasionally, but to achieve long-term results, you need to have a trading method that works for you.

Blindly following others may work in the short term, but in the long run, you must master your own trading philosophy and build your own system. Even if you follow experienced traders, you should not rely entirely on their opinions, but make sure that the strategy fits your trading style.

Summarize

We have discussed some common mistakes that should be avoided when using technical analysis. Trading is a skill that requires long-term practice, and maintaining a long-term perspective is the key to continued success. Through a lot of practice, perfecting trading strategies, and cultivating personal trading concepts, you will gradually find your strengths and weaknesses and ultimately take control of your investment decisions.