When it comes to business, everyone has a strategy. And in the case of navigating trading charts, a solid background in technical analysis is necessary.
The term technical analysis means studying the action and movements in a market to determine your actions to minimize mistakes and make a profit. Good technical analysis skill is important because it helps traders make accurate predictions after studying trends in trading charts.
Footprint charts are one of the best trading charts available. They are similar to candlestick charts but offer more information. A good explanation of the footprint chart found here can help you understand how to read and understand them properly.
To a beginner, technical analysis may appear easy and straightforward. But in reality, it takes time and practice to master. Technical analysis is typically used in complex markets like stock, forex, etc.
Mistakes are a part of life and are bound to occur every now and then. However, technical analysis influences investment decisions, and mistakes can be costly with far-reaching consequences. That is why this article is here to guide you on common technical analysis mistakes you should avoid.
Common mistakes to avoid in technical analysis
Here are some common mistakes you should avoid when analyzing a trade.
- Inadequate preparation or training
Before trading on online exchange markets, adequate preparation is key. Like Benjamin Franklin said, “By failing to prepare, you are preparing to fail.” The sad truth is that many people jump into trading with little to no preparation. This singular mistake has caused many traders heavy financial losses.
- Disregarding technical patterns
Impulsive trading is never a good idea. It will lead to avoidable mistakes that can cause substantial damage. Trading charts are there for a reason and should never be neglected. Don’t jump into trades and then “follow your gut.” Take your time to analyze charts and follow the trends. Following due process may not guarantee a profit, but it sure helps minimize losses.
- Poor consistency
Having a solid strategy and sticking to it is vital when trading exchange markets. It enables you to gain more experience within a short amount of time. It’s advisable to begin with a watch list that will give you a good analysis of various trades you’ve placed or are yet to place. Also, sticking to one timeline and not zooming into too many trades helps you closely monitor the trades you’ve placed.
- Overexcitement and fear
Most traders get excited when a trade is going in their favor and afraid when it’s going against them. In the former situation, excitement can make them abandon technical analysis and take reckless chances with a high risk of failure. While in the latter case, the fear of losing completely when a trade is going against them can make traders pull out prematurely from a trade that could have still gone their way.
When trading exchange markets, you should try not to make decisions based on emotions. Stick to the plan even when a trade isn’t going in your favor. When you’re winning, resist the urge to throw caution to the wind.
Over-trading is the excessive buying and selling of stocks. It is illegal for brokers to engage in overtrading to generate more commissions. While there are no laws prohibiting individuals from over-trading, it is still a bad practice. More often than not, it is counterproductive and leads to poor performance. Professional traders know when to take a break from the market.
- Chasing losses
Chasing losses, otherwise known as revenge trading, is a common scenario in trading. When a trader has encountered an enormous loss, or a string of small losses, they may try to place a one-for-all trade in order to regain all they’ve lost. Alternatively, they may engage in over-trading. Both paths are risky and will most likely lead to an even greater loss.
When you suffer huge losses, the best thing to do is to call it a day. When you decide to resume trading, you can either change your strategy or try to find out the chink in your current strategy to curtail future losses.
- Copying other traders
Using analysis made by other experienced traders is a good idea, but relying excessively on it isn’t. Although brokerage and exchange platforms try to make you believe otherwise, even professional traders suffer consecutive heavy losses. Sometimes, these losses can happen several days in a row. Imagine if you decide to continue blindly copying their trades despite the losses. You may be left with nothing in the end.
Keep in mind that trading on exchange markets is a game of risks and probabilities. The only way you can make real progress is by continuously improving your technical analysis skills.
Don’t be fooled by results over the internet claiming that trading is easy. Due your due diligence and understand the market you want to trade before risking your money. Finally, do not risk what you can’t afford to lose.