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EducationalSeptember 25, 2020

How to Avoid Making Common Mistakes in Technical Analysis

Shubham Goyal
Chief Business Officer
September 25, 2020

Cryptocurrencies have become two widely popular means of investment in 2020. As new traders enter the market and experienced ones continue to learn new lessons, it is important to understand how trading itself works. Investors usually analyze stocks and the cryptocurrencies, and other assets based on their fundamentals like – their revenue, industry trends, valuation. But the fundamental factors aren’t always reflected in the market prices. Technical analysis is a process by which we can examine and predict the price movements in an asset by studying historical data, mainly price and volume. It’s especially useful when trading derivatives like crypto futures or crypto options (side note: if you’re unsure about which derivative to trade, refer to this guide).

Even though it is impossible to predict the market 100%, technical analysis predicts the market environment in general. It is recommended for the investors to safely carry out the process to enjoy the fullest profit. Also, if you want to invest in cryptocurrency, always make sure to follow crypto news.

Common Mistakes We Make In Technical Analysis

Technical Analysis is an art that one masters over time. For beginners, it is essential to learn the basics of trading analysis. Although some of the mistakes are unavoidable, one must avoid making common mistakes for a better chance of gaining profit. Here is a list of the common mistakes the traders make:

Forgetting to Cut Your Losses

Although it seems like a simple step, it’s always smart to emphasize its importance. Your number one priority should be protecting your capital when it comes to trading. Starting with trading can have an intimidating effect. Investors often forget this point, and they start losing their capital.

Often, the traders don’t employ this mindset, which ultimately results in their poor performance in the long run. Even one bad trading can have a negative impact on your portfolio. Especially when trading crypto derivatives with leverage, where you can lose too much too quickly if you aren’t careful. That is why it is recommended that you should start with smaller position sizing, or it’s even better not to risk real funds. There are sites where you can try out your strategies without investing any real money.

Overtrading

It is pretty common for investors to think that they always need to trade. Cryptocurrency trading takes considerable analysis and patience, so it is recommended that you shouldn’t just trade for the sake of trading. Some traders may make less than a dozen trades per year and yet produce great returns.

Using Shorter Time Frames

Often, investors use very small time frames for investment. Like overtrading, selecting short time frames can also hamper your returns. Whether you use an indicator or follow a chart pattern, studying higher time frames will give you accurate results.

Selecting higher time frames while using an indicator will give you accurate signals, and chart patterns that are identifiable on higher time frames are more reliable. Also, you must always try to avoid revenge trading. Revenge trading is when an investor invests immediately after a loss to recover their capital. While trading, you should never let your emotions make important decisions.

Not Being Flexible

Cryptocurrency trading is not consistent. A strategy that works well in one market condition might not work well in the other. Many traders mistake treating support and resistance as specific points instead of treating them like general areas of buying or selling. If you want to become a successful cryptocurrency trader, you must be flexible.

It’s important for you to know where to draw your line and be strict about it. But, you should remember to be flexible when the price begins to interact with them. Also, while investing in cryptocurrency is never too attached to a particular coin, no coin keeps rising forever.

Ignoring the Extreme Market Conditions

Sometimes, the predictive qualities of the TA become less reliable. Such situations may happen due to black swan events or other extreme market conditions, driven by emotion and mass psychology. Cryptocurrency markets, like all other markets, are ultimately driven by supply and demand, and times may come when they’re extremely imbalanced to one side.

Making decisions solely depending on technical tools can result in your loss, especially during the black swan events, when the price action tends to be extremely hard to read. This is why it is always important to consider other factors.

Not Remembering that TA is a Game of Probabilities

Remember, technical analysis is based on probabilities, and it doesn’t deal with absolutes. In other words – regardless of how effective your strategy may seem, there is no guarantee that the market will meet your expectations. Especially when trading cryptocurrencies – which exhibit higher volatility than other assets and tend to have a markedly higher unpredictability to them.

No matter how experienced you are, it is recommended that you should never assume that the market will follow your analysis. So, you should always consider the other probabilities. Prepare for the worst.

Forcing a Setup

As a beginner, it might be challenging for you to identify trades. Often, beginners open up a chart on a coin to find a trade, but they don’t see any luck. It’s natural for a beginner to miss out on some stuff, but it’s always a bad idea to force a trade.

When there is an excellent technical setup, you won’t need to force one. If you can’t find a trade that’s suitable for you, don’t invest.

Trading isn’t easy. It takes time and practice for you to become consistently good at it. You need to continually refine your trading strategies and learn how to formulate your trading ideas. Of course, regardless of whether you’re a beginner or experienced trader, remember to always secure your crypto trading account.

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