The Seven Deadly Sins of Technical Analysis: 90% of Traders Fall into These Traps, Have You Been Caught?

Question

Original Title: 7 Common Mistakes in Technical Analysis (TA)

Original author: academy.binance

Source of the original text:

Compiled by: Daisy, Mars Finance

TL;DR

Breaking News: Technical analysis is hard! Once you've traded for a short period of time, you'll understand that making mistakes is part of the game. In fact, no trader can avoid losses—even seasoned traders who make fewer mistakes.

Despite this, almost every beginner makes some basic mistakes when starting out. Top traders always maintain an open mind, rationality, and composure. They are clear about their strategies and continuously interpret the information conveyed by the market.

If you want to succeed, you need to do the same! By cultivating these traits, you will be able to manage risks, analyze mistakes, leverage strengths, and continuously improve. Strive to be the calmest person in the room—especially when the situation worsens.

Now let's take a look at how to avoid the most obvious mistakes!

Introduction

Technical analysis (TA) is one of the most mainstream analytical methods in financial markets, applicable to almost all financial markets—stocks, forex, gold, or cryptocurrencies.

Although the fundamental concepts of technical analysis are relatively easy to understand, it is a skill that is difficult to master. Making mistakes is a natural part of learning any new skill, but in trading or investment, this can lead to particularly serious consequences. If you do not act cautiously and learn from your mistakes, your principal may significantly diminish. While learning from mistakes is valuable, the best strategy is to avoid making mistakes whenever possible.

This article will introduce some of the most common mistakes in technical analysis. If you are a trading novice, it is advisable to first understand the basics of technical analysis. Please read "What is Technical Analysis?" and "The 5 Core Indicators of Technical Analysis."

So, what are the most common mistakes that beginners make when using technical analysis for trading?

No stop loss

Let's first quote the famous saying of trader Ed Seykota:

"The elements of excellent trading are: ( stop loss, ) stop loss, ( stop loss. If you can adhere to these three rules, you may still have a chance."

This may seem simple, but it can never be overstated how important it is. In trading and investing, protecting the principal should always be the top priority.

Entering the world of trading can be daunting. Beginners may consider the following solid strategies: the first step is not to make a profit, but to avoid losses. This is why starting with a small position, or even not investing real money, can be more beneficial. For example, Binance Futures offers a testnet where you can validate your strategy before risking hard-earned money. This way, you can protect your principal and wait until you consistently produce good results before investing real money.

Setting a stop loss is a basic rationality. Every trade should have a point of failure—at this moment you need to "admit defeat" and accept that your trading idea was wrong. If you do not trade with this mindset, it will be difficult to succeed in the long term. Even a single bad trade can severely damage your portfolio, and in the end, you may be forced to stubbornly hold onto losing positions, waiting in vain for the market to recover.

Overtrading

Active traders often make the mistake of thinking they must always hold a position. Trading requires a lot of analysis and even more patience to wait! Some strategies may require waiting a long time to obtain reliable entry signals. Some traders may trade less than three times a year and still achieve amazing returns.

Refer to the advice of day trading pioneer Jesse Livermore:

"Profits come from waiting, not from trading."

Avoid trading for the sake of trading. You don't need to always hold a position. In fact, in certain market conditions, staying put and waiting for opportunities can be more beneficial. This allows you to preserve capital while being ready to strike when a good opportunity arises. Remember: the market will always present opportunities again; you just need to wait patiently.

Similar mistakes stem from over-focusing on short-term charts. Long-term analysis is generally more reliable than short-term analysis, as short-term charts generate a lot of market noise that can tempt you to trade frequently. Although there are successful scalpers and short-term profit-takers, short-term trading is usually associated with poor risk-reward ratios. As a high-risk strategy, it is absolutely not recommended for beginners.

Retaliatory Trading

A common phenomenon is that traders rush to recover their losses after experiencing significant losses, which is known as revenge trading. Whether you want to become a technical analyst, a day trader, or a swing trader, it is crucial to avoid emotional decision-making.

It's easy to stay calm during smooth sailing or minor mistakes. But what about when the situation is completely out of control? Can you still stick to your trading plan when everyone else is in a panic?

Stubborn and unwilling to change

To become a successful trader, one must be willing to frequently change their perspective. The market environment can change in an instant, but one thing is certain: change is constant. It is the trader's responsibility to identify these changes and make adjustments. Strategies that perform well in a specific market environment may completely fail in a different one.

Legendary trader Paul Tudor Jones describes his positioning mindset as follows:

"I assume every position I hold is wrong every day."

Try to examine your viewpoints from the opposing side and identify potential weaknesses. This is a great exercise. Only then can your investment logic (and decision-making) be more comprehensive.

This also brings up another key point: cognitive bias. Bias can seriously affect decision-making, cloud judgment, and limit the range of possibilities you can consider. At the very least, understanding the cognitive biases that may affect your trading plan will allow you to mitigate their consequences more effectively.

Ignoring extreme market conditions

Sometimes the predictability of technical analysis can become unreliable. It could be due to black swan events, or extreme market conditions driven by emotions and crowd psychology. After all, the market is driven by supply and demand, and there can sometimes be severe one-sided imbalances.

Taking the momentum indicator Relative Strength Index (RSI) as an example. Typically, a reading below 30 is considered a sign of an asset being oversold. But does this mean that an RSI drop below 30 is a buy signal? Absolutely not! It merely indicates that the current market momentum is dominated by sellers, i.e., selling pressure is stronger than buying interest.

Under abnormal market conditions, the RSI may reach extreme values—falling even into single digits, close to the theoretical minimum value (zero). However, such extreme oversold readings do not necessarily indicate that a reversal is imminent.

Making blind decisions based solely on technical indicators reaching extreme values can lead to significant losses. This is especially true during black swan events, when price movements are often very difficult to interpret. During such periods, the market may continue to operate in a one-sided manner, and no analytical tools can prevent this. Therefore, it is essential to consider other factors comprehensively and not rely on a single tool.

Pay attention to the word "analysis" in "technical analysis." This naturally implies that one should treat the market with an analytical approach, right? If that's the case, why make hasty emotional decisions within this framework? If you want to be among the top traders, you must remain calm even after making significant mistakes. Reject emotional decision-making and always maintain a logical analytical mindset.

Trading immediately after a significant loss often leads to more losses. Therefore, some traders take a complete break for a period of time after experiencing a major loss. This way, they can regroup with a clear mindset.

Ignoring technical analysis is a probability game.

Technical analysis does not provide absolute conclusions, only probabilities. This means that regardless of the technical methods you use to formulate strategies, the market may not behave as expected. Your analysis may indicate a high probability of market fluctuations, but this still does not guarantee a certain outcome.

When formulating trading strategies, this point must be considered. Regardless of how experienced you are, it is unwise to assume that the market will comply with your analysis. If you hold this mindset, you are likely to over-leverage, go all-in, and ultimately incur significant financial losses.

Blindly following others in trading

Mastering skills is key to mastering any skill, especially in financial market trading. In fact, the ever-changing market environment makes this a necessity. Learning from experienced technical analysts and traders is one of the best ways.

However, if you want to continue to perform well, you need to explore and strengthen your strengths. This can be referred to as your "trading advantage", which is the unique trait that sets you apart.

A close reading of interviews with successful traders reveals that their strategies often vary greatly. In fact, a perfect strategy for one trader may be viewed as completely unfeasible by another. There are countless ways to profit in the market; you just need to find the one that best fits your personality and trading style.

Trading based on others' analyses may sometimes yield gains, but blindly following without understanding will inevitably lead to failure in the long term. This does not mean that one should not learn from others; the key lies in whether you agree with the trading philosophy and whether it aligns with your trading system. Even if the other party is experienced and well-known, one should not follow blindly.

Conclusion

We discussed the fundamental mistakes that should be avoided when using technical analysis. Remember that trading is not easy, and adopting a long-term mindset is usually more feasible.

Becoming a consistently profitable trader takes time and accumulation. This requires perfecting strategies through extensive practice and learning to develop one's own trading mindset. Only then can one discover advantages, recognize weaknesses, and truly take control of their investment trading decisions.