Here're the top technical analysis mistakes traders must avoid at all costs

Learning technical analysis is a tedious task which takes years of practice and study to master. Traders undergo a whole lot of emotions till they can get a fair idea about the structure and skills involved in technical analysis. And, because of this, a few market participants tend to deviate from the core ideology of technical analysis. However, doing so may lead to losses which in turn, destroys the trading morale.

Avdhut Bagkar | Business Standard
28th November

Here are the lists of behaviours that traders should avoid

Adamant about holding stock

Whenever the stop loss (SL) is hit, the trader should cut his losses without a second thought. This might look hard but it is extremely important to trade cautiously with the right approach. Holding on to the losses with a belief of reversal may destroy your profitability and one wrong trade can wipe out all your earnings.

Overtrading

Technical analysis is all about finding the right trade with high accuracy. This is possible in one or two trades in a day. Occasionally, one might find numerous trades, but it is not advisable to trade all of them. Sometimes identifying numerous trading signals can result in aggression as it is difficult to manage several trades with the same focus.

Mixing emotions with the trading tools

Whenever a system generates a trading signal, it should not be mixed with external factors. Technical analysis is about data filtration, and so, the accuracy in filters assists in delivering a right trading signal. Once such a signal is generated, one should not mix his/her emotions with it, otherwise, the outcome would be irrational.

Following other analysts/ traders

It's always a wiser choice to get fully equipped with all the aspects of technical analysis instead of relying on others to navigate the trade.

Struggling to manage trading positions

If the trading system starts to give fluctuating signals, then it is better to either minimise the trading positions or exit them. This usually happens due a sudden development and, in response, technical tools turn volatile. During trading, one needs to have a calm mind while working on the technical software.

Overconfidence

Once traders get a hold of technical analysis, their behaviour tends to become exaggerated. As a result, they take blind/ risky bets, which does not suit technical trading. One needs to make a plan about trading and strictly adhere to it.

Falsifying the risk-ratio

A trade is purely dependent on the risk and returns ratio and it should never be played around with. When a strategy starts to yield returns, then messing with risk–reward ratio means pure gambling. Anyone can get carried away by profitability; however, sticking to one's own created risk-ratio facilitates trading confidence and increases long term productivity.

Disclaimer: The analysis has been done by a Business Standard reporter who is a certified technical analyst. The analysis does not represent the views of Kotak Securities.

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