Many people believe that short term trading is the key to acquiring riches. Most read a book or a few articles and assume that technical analysis can predict the market behavior. This superficial knowledge complemented by an intensely burning emotional greed is what leads to most losing their initial investment in a very short period of time.
The harsh reality is that passive investing is probably the easiest way to make money on the financial markets, whereas technical analysis based trading can be the most difficult and risky form of market participation.
Most of these people fail to realize that the markets are deceptively difficult and a tiny minority is capable to beating and or timing the market. Following are a few common charting mistakes associated with charting or technical analysis.
Trading Against the Trend
One of the most common sayings in the financial world is that, “the trend is your friend”. Trading along the trend is probably the likely path to trading success. However, people still trade against the trend in hope of a huge short term gain. But shorting an overvalued stock in a bull market is simply foolhardy. The trend is the first thing a trader needs to understand and internalize before he or she can succeed in both short and long term trading.
Traders are offered a wide variety of technical indicators, some are effective in a trending market while others are useful in a range/consolidation market movement. Forecasting short term price movements using trend based indicators while the price is bound within clearly defined support and resistance levels only leads to imminent failure. Trend based indicators provide a huge number of oversold and overbought signals while the price is in consolidation. Understand each and every indicator and its mechanics before you make decisions regarding your money.
Trading based on emotions is a major reason why even a good technical analyst fails to make money trading. Good trades aren’t that difficult to make, as the second the price moves away from the forecasted direction, people start selling due to immense fear. Allowing your emotions into your trades is the number one reason why most buy high and sell low.
It is true that most indicators alone don’t offer any real analytical value, as most offer an insight into the full picture when complemented with other indicators. For example, using RSI alone with a short term moving average MA tends to provide a decent insight into the price movement; however, overloading your screen with ten different indicators will only lead to paralysis of analysis. Understand that complexity is not the key to good technical analysis simplicity is.
To be a successful trader, you must discard your absolutist view of the market or your strategy. No single strategy will perform well every time. Avoid believing everything you read or see on the internet. With the huge amount of information, it’s nearly impossible to verify it. Create your own strategy, back-test it using your own knowledge and never assume it to be absolute.
Over Emphasizing Volume
Yes, it’s a fact that volume plays a significant role in determining market behavior. However, over-analyzing volume will only spell doom for your trading activities. Volume should only be used to confirm an existing trading plan and should not serve as a foundation of a trade. So don’t waste too much time on analyzing the volume.
Trading can be an extremely profitable activity. Financial Market Wizards offers buy and sell alerts based on optimum usage of technical analysis, especially for short term traders. The advisory service has helped thousands generate huge profits in the market. For more information, contact us at [email protected], or call us now at 1-951-834-6617.