It’s taken me years to figure out how to use technical analysis to navigate charts and the markets. I love teaching other traders how to do the same, so naturally, I’ve seen them make lots of technical analysis mistakes.
Formal training is really important, something I never got. When I was in college at San Diego State, one of my final classes was “Portfolio Management.” The instructor covered technical analysis during a measly two sessions and dismissed it as an irrelevant science that nobody uses. He even said it’ll eventually disappear. Boy was he wrong.
Without formal training by an experienced technician, it is very likely you will make (costly) mistakes.
The two biggest technical analysis mistakes traders make
Dismissing technical patterns
Dismissing patterns is the most common mistake. The cause? Bias towards holding a stock or position. It doesn’t matter how much you love, say, Nike running shoes. If the Nike chart is telling you to sell, sell! Bias allows emotions to color your trading, and it has no place in technical analysis. You can still love Nike, but you don’t need to lose money over it.
On the flip side, you might notice that NVIDIA has fallen 20%, but not below support levels. Don’t ignore that! It’s time to buy.
Jumping the gun on analysis
Traders who are new to technical analysis often try to interpret a chart before a pattern is fully formed. They then enter a position prematurely – a major error.
I see this a lot with the bullish morning star pattern. A morning star signals a reversal in a down trend, and it appears as three candlesticks (the first is tall, the second is smaller and the third is tall).
New technicians often jump the gun when they see the second candlestick form. This is when the bears give way to the bulls, but the new upward trend is not confirmed until the third candlestick is fully formed. If you jumped the gun, you risk loss. Patience will serve you well as a technician.
Technical patterns are time-tested and often very accurate in predicting the next move. Do everything you can to learn more about them and how to use them. When I first started learning about charting techniques, I had few options. You have so many now – use them (and avoid making the two technical analysis mistakes above)!