5 Common Mistakes In Technical Analysis (TA)
Touted as the most complex method of analysis in the trading world. It is a trading discipline that utilizes statistically analyzed trends accumulated from trading activities such as volume and price movement to identify trading opportunities and evaluate investment prospects.
Technical analysis is a tool used to scrutinize supply and demand patterns and predict its vitality and how it will affect the price and volume of security. It differs from the more conventional fundamental analysis which focuses on ascertaining a security's value by evaluating business results i.e sales and earnings.
Technical Analysis is widely used by professional traders because of its accuracy in deduction of asset value trends in a variety of securities like commodities, stock, currencies, futures, fixed income, etc. Although Technical Analysis tools are usually utilized to generate short-term trading signals, it also enhances the evaluation of a security's weaknesses and strengths in a broader market or a specific sector. This data generally optimizes the overall estimates for analysis.
Mistakes that traders make in Technical Analysis
With all its advantages, only competent traders can utilize its tools to their greatest potential. Most traders tend to lose their cool after a bad trade and have that 'revenge mentality' and make rash decisions.
The best traders don't lose their wits when the going gets tough, they can analyze their mistakes and keep improving. You need to be able to do this to be a successful trader, here are 5 mistakes that traders usually make when using the Technical Analysis for trading:
Blindly following the advice of other traders
At the beginning of your trading career, as an amateur, it is understandable to take advice from more experienced traders. But as you advance and begin to learn the ropes, you should begin to create your style of trading, techniques, strategies, mode of analysis, and all.
This is because trading strategies and techniques are not a one fits all type of system. A method used by one successful trader does not necessarily assure success for another trader. Although the following tips and advice provided by another trader could bear fruits on occasion, it is not a dependable solution for longevity. Ensure to perform background checks on tips and also make sure that it fits into your trading system.
Denial about Technical Analysis is a game of probabilities
Although technical analysis boasts a high probability prediction rate, it is not a perfect system, if it was, the market would have crashed a long time ago. Technical analysis offers no absolute trading data, it still works under the law of probabilities. This simple truth is sometimes difficult to comprehend by a lot of traders. They go about their business, making trades with the belief that Technical Analysis has provided them with the ultimate analysis.
No matter how high the probability appears to be, it is never 100% accurate. It is necessary to always keep the knowledge of this at the back of your mind whilst setting up trade strategies. Remember, the minimization of loss is also an attribute of a good trader. If you depend too strongly on your analysis, you could end up oversizing or under-sizing a trade.
Ignoring extreme market conditions
Some market atmosphere cannot be measured or predicted. It is always wise to keep a cool head during these situations and observe the movement of the charts, considering all the necessary factors before making a trade. Blindly making rash trade decisions during extreme market conditions holds a high probability of a huge loss of capital.
This is why it is important to not rely on a single tool during these conditions as markets tend to be highly volatile under these conditions.
Refusing to cut your losses
Highly experienced and successful traders have always emphasized the boldness and presence of mind to cut your losses. Although it may seem simple and unnecessary to even mention, it is one of the hardest principles for traders to follow.
Trading carries certain similarities to gambling as losers always tend to lose more because of the refusal to take a step back. With regards to trading, investing, protection of capital should always be the priority. If you do not apply this mentality to your trading procedure, you will most likely not be a trader for long.
This is where the stop order becomes very important because it helps you achieve your profit goals and limit your losses. You can set a limit to how much loss you can accrue using this tool, it will help control your gambling side who doesn't like to lose.
This is probably the habit that all traders have been guilty of at one point in their career or another. The need to keep making more money by making more trades has gotten a lot of us into some deep problems. Getting 'money crazed' on the market is one of the worse things you can do to your portfolio.
Trading requires a lot of patience, with long periods spent sitting and waiting for the right time to strike. Some traders are notorious for naming few trades per year but still making a killing. Entering trades just for the sake of it is the beginning of a potential disaster. As a beginner, it is not advisable to over engage in lower time frame trades as they are more volatile than higher time frames trades. Learn to exercise patience and you will surely be a successful trader.
If you can avoid all the above mistakes while trading using the Technical Analysis tools, you stand a much higher chance of building a competent portfolio as a trader. Expertise at trading takes time and patience, you need to educate yourself on improving your investment approach and mindset.
Take the time to form your trade system, ideas, and strategies as these will help curb your weaknesses and improve your strengths. Good luck trading!
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