Overly trusting technical analysis, ignoring the overall market conditions, and relying on a single indicator can all lead to investment strategy failure. Investors should remember to avoid the following three pitfalls.
(Previous Context:
Arthur Hayes warns: Bitcoin will experience a “major crash” before and after the halving, no trading until May, what did he see?
)
(Background Supplement:
Pantera Capital: Bitcoin’s current bull market will surpass $170,000! Future market value is “half of gold”
)
Table of Contents
Three common misconceptions in technical analysis
1. Failing to strictly control stop-loss
2. Oversimplifying technical analysis and ignoring the overall market conditions
3. Technical analysis needs to be combined with multiple indicators
Conclusion
For novice investors in stocks or cryptocurrency markets, technical analysis seems to be a charming guide, promising a path to financial freedom.
However, many investors quickly discover that even with entry signals, profitability is not guaranteed, and they often find themselves in a loss-making situation.
Why does this happen? The problem usually lies not with technical analysis itself, but with the users’ understanding and application of these tools. Novice investors often make some basic but fatal mistakes in the practice of technical analysis. This article will explore the four common mistakes made by novices in using technical analysis, aiming to help investors identify and avoid these pitfalls, thereby increasing the success rate of their investments.
When it comes to investing and trading, stop-loss mechanisms are crucial, especially for novice investors, as establishing an effective stop-loss strategy is essential to protect assets. One of the most common challenges for novice investors is emotional trading.
When the price of stocks or other assets fluctuates, emotions often influence investors’ judgment, leading to irrational decisions. For example, overly trusting technical analysis and continuing to add positions despite the wrong direction, or even wanting to increase positions to earn more, which may result in liquidation. (Contract investors, in particular, should pay more attention to stop-loss)
Firstly, novice investors should determine their risk tolerance, meaning understanding the maximum loss they can bear. Then, they can use technical analysis tools to determine the stop-loss point. (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 determining the stop-loss point when entering a trade and executing the stop-loss order immediately when the stop-loss point is reached, rather than being influenced by emotions. This can be achieved by setting stop-loss orders, which will be automatically triggered when the asset price reaches the preset level.
Finally, investors should adhere to their stop-loss strategy. This means firmly executing stop-loss orders regardless of how the market fluctuates. Although stop-loss may cause investors to miss some potential returns, it can protect them from significant losses.
In summary, stop-loss mechanisms are crucial for novice investors to protect their investments to the greatest extent possible and reduce the risks of emotional trading.
Overly relying on technical analysis may cause investors to overlook the overall market trend. Technical analysis tools are usually used to identify short-term market trends and volatility. However, if long-term trends and overall market conditions are ignored, investors may miss a comprehensive understanding of the market.
For example, even if technical indicators show that a stock is in an upward trend, if the overall market is in a downward trend or facing significant uncertainty, investors should be more cautious and consider adjusting their stop-loss strategy.
Especially in the cryptocurrency market, which is relatively less mature, prices are more susceptible to other market factors.
For example, in the case of Bitcoin, after years of development, BTC is now more closely connected to various parts of the modern financial market, such as the global economic environment, political situations, Federal Reserve monetary policies, and other factors that can have a significant impact on Bitcoin.
Therefore, when formulating investment strategies, investors should also consider the overall market conditions and changes in other related markets, rather than solely relying on signals provided by technical analysis tools.
Technical analysis requires the combination of multiple indicators to comprehensively evaluate market conditions. A single technical indicator often cannot provide sufficient information, so investors should combine various data for analysis to better understand market trends and volatility, and thus formulate more effective investment strategies.
For example, commonly used indicators in technical analysis include moving averages, relative strength index (RSI), MACD, etc. These indicators have their own characteristics and can provide different aspects of market information. By combining these indicators, investors can obtain more comprehensive market analysis.
Moving averages can help investors identify the direction and strength of market trends; RSI can measure market overbought and oversold conditions; MACD can capture market momentum changes.
In addition, technical analysis also involves various pattern analyses, such as head and shoulders, double tops, triangles, etc. Usually, if investors solely rely on a certain pattern to enter the market, they often end up being harvested by whales and becoming “leeks”.
Therefore, by combining multiple indicators, different time frames, and other forms of analysis, investors can obtain more comprehensive and accurate market analysis, thereby formulating more effective strategies.
The market is unpredictable, and overly simplifying technical analysis, ignoring the overall market conditions, and relying on a single indicator’s inadequacy can all lead to the failure of investment strategies. Therefore, investors should be careful to avoid these pitfalls and strive to improve their market analysis capabilities and decision-making levels.
Hope this article can help you go further and achieve better results on your investment journey.