For novice investors in the stock or cryptocurrency markets, technical analysis can seem like a charming guide, promising a path to financial freedom.
But although technical analysis is to predict future market behavior by studying the market's past price trends and trading volumes. Many investors soon discovered that even if an entry signal appears, profits are not guaranteed and they are often even in a state of loss.
Why is this so? In fact, the problem usually does not lie with technical analysis itself, but with the user's understanding and application of these tools. The common mistakes that novice investors make in the practice of technical analysis are often some basic but fatal landmines. This article will discuss four common mistakes made by novices when using technical analysis, aiming to help investors identify and avoid these pitfalls, thereby increasing the success rate of investment.
Before we delve into these common mistakes, let us first establish a consensus: Technical analysis is not a shortcut to making money, but a scientific method that requires rigorous study and practice.
Three common misunderstandings in technical analysis
ㄧ. Failure to strictly control stop loss
When it comes to investing and trading, the stop-loss mechanism is a crucial part, especially for novice investors. Only by establishing an effective stop-loss strategy can you protect your assets. Because one of the most common challenges for novice investors is the tendency to trade emotionally.
When the prices of stocks or other assets fluctuate, emotions often affect investors' judgment and make irrational decisions. For example, if you believe too much in technical analysis, when a market entry signal appears, you will continue to place negative orders in the wrong direction, or even want to increase your bets to make more, resulting in a liquidated position. (Especially contract investors should pay more attention to stop loss)
First, novice investors should determine their risk tolerance, which means knowing the maximum loss they can tolerate. Then use technical analysis tools to determine stop loss points. (Usually technical analysis can help investors identify support and resistance levels, thereby determining appropriate stop loss points)
Next, investors should set clear stop-loss orders. This means identifying your stop loss when entering a trade and executing your stop loss order as soon as it is reached, rather than being swayed by emotion. This can be achieved by setting a stop-loss order, which will automatically trigger when the asset price reaches a preset level.
Finally, investors should adhere to their stop-loss strategy. This means that no matter how the market fluctuates, stop loss orders must be resolutely executed. While a stop loss may cause investors to miss out on some potential returns, it can protect them from large losses.
In general, the stop-loss mechanism is crucial for novice investors to protect their investments to the greatest extent and reduce the risks caused by emotional trading.
2. Oversimplifying technical analysis and ignoring overall market conditions
Relying too much on technical analysis may cause investors to ignore the general trend of the market. Technical analysis tools are often used to identify short-term market trends and volatility, but if long-term trends and overall market conditions are ignored, investors may miss out on a comprehensive understanding of the market.
For example, even if technical indicators indicate that a stock is in an uptrend, if the overall market is in a downtrend or faces significant uncertainty, then investors should be more cautious and consider adjusting their stop-loss strategies.
Especially in the cryptocurrency market, the maturity is relatively low, and prices are more easily affected by other market factors.
If we take Bitcoin as an example, after years of development, BTC has become more closely connected with various parts of the modern financial market. For example, the global economic environment, political situation, Federal Reserve monetary policy... and other factors may have an impact on Bitcoin. Tremendous influence.
Therefore, investors should also take into account overall market conditions and changes in other related markets when formulating investment strategies, rather than relying solely on signals provided by technical analysis tools.
3. Technical analysis needs to cooperate with multiple indicators
Technical analysts need to cooperate with multiple indicators to more comprehensively assess market conditions. A single technical indicator often cannot provide enough information, so investors should combine a variety of data for analysis to better understand market trends and volatility, and then formulate more effective investment strategies.
For example, commonly used indicators in technical analysis include moving averages, relative strength index (RSI), MACD, etc. Each of these indicators has its own characteristics and can provide different aspects of market information. By combining these indicators, investors can obtain a more comprehensive market analysis.
- Moving averages can help investors identify the direction and strength of market trends;
- RSI measures overbought and oversold conditions in the market;
- MACD captures market momentum changes.
In addition, technical analysis often teaches various patterns, such as head-and-shoulders tops, Double Top, triangles, etc. Usually, if you only rely on a certain pattern to enter the market with key signals, you will often be harvested and reduced to leeks by large investors.
Therefore, by combining multiple indicators, different time frames and other forms of analysis, investors can obtain a more comprehensive and accurate market analysis and thus develop more effective strategies.
in conclusion
The market is unpredictable, and oversimplifying technical analysis, ignoring overall market conditions, and the insufficiency of a single indicator may lead to the failure of investment strategies. Therefore, investors should pay attention to avoid the above traps and strive to improve their market analysis capabilities and decision-making skills.
I hope this article can help you go further on the investment path and achieve better results.
