Technical Analysis is one of the primary skills for a crypto trader. It enables the investor to read graphs, charts and make sense of the market trends. It has simple concepts thus is easy to learn but quite hard to master and apply. Here, we will briefly introduce you to technical analysis and the common mistakes made by trading beginners.
What is Technical Analysis?
Technical Analysis in trading is a discipline where traders use statistical analysis on past and present data and trends to predict future price movements and make better investment decisions. It is more concerned with finding patterns in the price movements rather than the business health of the parent company of the crypto asset.
Technical analysis is a perfect tool for evaluating short-term price movements of an asset and is often used by investors for the valuation of a crypto asset and its performance viz a viz the other tokens and currencies. TA is also the foundation for obtaining reliable crypto signals for trading.
Generally, technical analysts keep an eye on the following indicators:
- Price trends
- Moving averages
- Volume and momentum
- Support and resistance levels
The intended goal is to understand the price movements, and different traders can use diverse techniques, tools, and indicators to make their decisions find the right crypto trading signals to time their entries.
Some widely known techniques in technical analysis are Simple Moving Averages, Trend Lines, and Support & Resistance Levels.
Simple Moving Averages use short and long-term moving averages of daily prices to inspire action among the traders. When one average line crosses over the other, it is the time to buy or sell. If the short-term line goes above the longer duration average, it means the daily price has an increasing trend.
Trend Lines generate by the projections of past data into the future while accounting for any newer market developments. They provide a general indication about the direction of price movement in the present market conditions.
Support & Resistance Levels give a defined entry and exit point to the traders with the help of the past data. The lowest price or an average of past minima is considered the support level at which the buyers intervene. Similarly, the highest point of past activity, or an average of such points, is the resistance level, above which the sellers do not let the currency go.
Technical Analysis – Common mistakes
Following are some of the most common mistakes that beginners make but should avoid while doing technical analysis:
- Overtrading: Traders do not always keep trading unless they are scalping. It is far more crucial to analyze first and then make a trading decision.
- Ignoring loss cutting: Beginners often forget to cut losses from their calculations, leading to accounted losses at the end of the trade.
- Being inflexible: Beginners act stubbornly to maintain their position, even while pursuing a wrong strategy.
- Blindly trusting others: While it is good to copy when you are a complete beginner with no desire to trade actively, someone looking to turn a full-time trader should never do this.
- Ignoring basics: There are several basics that beginners tend to ignore, such as Technical analysis is a game of probability. Or that moving averages are useless for volatile markets, or that once one side of the support and resistance levels breaks, the other side stands invalidated itself.
Technical analysis is tricky, and anyone can end up making mistakes while performing TA. Hence, the first tip is always to proceed with caution. It holds for the experts and more so for the beginners.