Common Mistakes in Technical Analysis and How to Avoid Them

Tue Apr 11 2023

Technical Analysis is a universal tool in trading, but it's only as effective as the way it's being used. Here are some of the main mistakes to avoid when using technical analysis in your algorithmic trading.

Technical analysis is a widely used method of analyzing financial markets, including cryptocurrencies. While the basic concepts of technical analysis can be relatively easy to grasp, it’s a difficult art to master. Making mistakes is part of the game, but there are some trivial mistakes that almost every beginner makes when starting out. In this article, we will introduce you to some of the most common mistakes in technical analysis and how to avoid them.

Naturally all of these concepts apply to manual as well as algorithmic trading. In fact, understanding how to correctly use Technical Analysis Indicators, and that the main pitfalls to avoid are is a prerequisite to algorithmic cryptocurrency trading.

Mistake #1: Having No Risk Management

Protecting your capital should always be your number one priority when it comes to trading and investing. Starting out with trading can be a daunting undertaking, so it can be favorable to start with smaller position sizing, or not even risk real funds. Setting a stop-loss is simple rationality. Your trades should have an invalidation point. This way, you can protect your capital and risk it only once you’re consistently producing good results.

Mistake #2: Trading Too Much Or Overtrading

It’s common for active traders to think they always need to be in a trade. However, trading involves a lot of analysis and a lot of patience. Some trading strategies may require a long time to get a reliable signal to enter a trade. Some traders may enter less than three trades per year and still produce outstanding returns. Avoid entering a trade just for the sake of it. In some market conditions, it’s actually more profitable to do nothing and wait for an opportunity to present itself.

Mistake #3: Chasing Losses

Chasing ones losses happens when traders try to immediately make back a significant loss. Emotional decisions can heavily affect your decision-making, cloud your judgment, and limit the range of possibilities you’re able to consider. If you want to be among the best traders, you should be able to stay calm even after the biggest mistakes. Avoid emotional decisions, and focus on keeping a logical, analytical mindset. Trading immediately after suffering a big loss tends to lead to even more losses.

Mistake #4: Not Knowing When To Quit

Market conditions can change quickly, and your job as a trader is to recognize those changes and adapt to them. One strategy that works really well in a specific market environment may not work at all in another. It’s good practice to try to take the other side of your arguments to see their potential weaknesses. This way, your investment theses (and decisions) can become more comprehensive.

Mistake #5: Ignoring Extreme Market Conditions

There are times when the predictive qualities of technical analysis become less reliable. These can be black swan events or other kinds of extreme market conditions that are heavily driven by emotion and mass psychology. During times like these, the markets can keep going in one direction or the other, and no analytical tool will stop them. This is why it’s always important to consider other factors as well, and not rely on a single tool.

Mistake #6: Not Realising That TA Is all About Probabilities

Technical analysis deals with probabilities, not absolutes. This means that whatever technical approach you’re basing your strategies on, there’s never a guarantee that the market will behave as you expect. You need to take this into account when you’re setting up your trading strategies. No matter how experienced you are, it’s never a great idea to think the market will follow your analysis.

Mistake #7: Blindly Following Other Traders

Following experienced technical analysts and traders is one of the best ways to learn. However, you also need to find your own strengths and build on them. If you just blindly follow other traders without understanding the underlying context, it most definitely won’t work over the long-term. You should not be blindly following other traders, even if they are experienced and reputable.

Conclusion

Becoming consistently good at trading is a process that takes time. It requires a lot of practice in refining your trading strategies and learning how to formulate your own trade ideas. This way, you can find your strengths, identify your weaknesses, and be in control of your investment and trading decisions. Remember, trading isn’t easy, and it’s generally more feasible to approach it with a longer-term mindset.