Trading in cryptos can prove to be tricky. Besides having so many competing assets – 7800 by CoinMarketCap’s count in early December 2020 – you have to contend with by-the-minute movements. Faced with these factors, you need tools to help you in tracking market sentiments.
Today, any crypto trader has several tools they’d use in mapping market trends. One of these is Technical Analysis (TA). But it’s one thing to have an analysis tool and another to use it gainfully.
Adopting profitable TA strategies is a craft perfected over time. As such, it’s usual for newbies to encounter challenges hence err in their usage.
In this article, we highlight five of the biggest mistakes that beginners make in crypto TA. Sure, the list doesn’t include all the mistakes you’re likely to make as a rookie, but it provides an excellent headstart for pinpointing areas where you could go wrong.
Let’s dive right into it, shall we?
1. Reliance on Low Time Frames
Proper technical analysis relies on reliable data. Consequently, traders need enough data for accurate predictions. This entails tracking a coin’s performance for weeks or even months.
Tunnelling the Vision
Most first-timers’ undoing is restricting their analysis to a day or even less. That is to say, they tunnel their vision. In reality, they ought to be using more extended time frames as these provide reliable data.
Employing longer timeframes makes it easy to discern long-term trends, crucial swing points, levels and other vital indicators.
On the contrary, using shorter time frames obscures the bigger picture. Therefore, traders falling into this trap miss not only the trends and pivots but a whole lot more.
Effects of Time Frame on Price Action
Going big helps you get an idea of the digital asset’s price history and present trend. It is worth remembering that price action is more responsive to the long term rather than short term trends.
Should indicators be your thing, you’ll realise that higher time frames give strong signals. For instance, a 1 day MA Death cross is a more robust pointer of change compared a 1 hour MA Death Cross.
Again, chart patterns drawn from higher time frames are more reliable and point to more significant hence richer moves.
Go Big to Go Small
Emphasis should be on going out big. From there, one can reduce the time frame to accommodate their entry or other short term outcomes.
2. Taking the Support and Resistance Lines as Hard Set Points
Support and resistance zones are just but guidelines of where trading takes place. It would be best if you didn’t take them for fixed points.
When charting support and resistance lines, it is therefore helpful to view them as general trading areas. It’s unlikely that you’ll have the same chart as everyone else. Further, it’s inconceivable that all traders will be trading with exact precision.
A trader that treats their lines as hard set zones opens themselves to the exploitation of whales or market makers. What this means is that they’ll cause the price to dip marginally below the support or above resistance. In turn, this will trigger their stop loss, pushing the price back inside the range after shaking them from their positions. The end is unprofitable.
To sum it up, be strict when drawing lines but adaptable when interacting with the price. Additionally, using higher time frame charts helps to filter the noise resulting from the price interaction with your lines.
3. Seeking Signals
Unbiased TA will always indicate technical setups open for the taking, which is not the case when emotions get the better of the trader. Objective TA eliminates the need to manipulate lines to suit one’s intentions; they don’t have to force setups they deem favourable.
No, Don’t Follow Your Heart!
Unfortunately, emotions do get the better of some novices. They open up a chart on crypto assets they like convinced that there are opportunities they’ve not identified yet. It’s there only they can’t see it…They tend to follow their hearts rather than fact in deciding trades; always ending in disastrous outcomes.
Truth is you needn’t feel pressured to trade! Refraining from trading is in itself trading too. When starting out, you’ll indeed miss several opportunities, but this improves with time.
In Technical Analysis, Patience is Key
Just because you’re convinced that there’s an opportunity for the taking, doesn’t mean that it does exist. You’d rather miss out on the chance to make money than force a trade from which you lose money.
Bottom line is if you’re craving for a trade, you’ll find a signal prompting you to trade regardless of there being one or not. It’s better to exercise patience and only go in for situations whose signals you can bank on. Walk on if there’s no clear cut opportunity.
4. Misapplication of Indicators
Another common error is the wrong application of indicators. Most beginners resort to them to cover their inability to use price action for charting and trading.
It is crucial to muster charting without indicators first. One can introduce indicators to gain confidence or get an idea of possible price behavior when it interacts with their lines.
Underutilisation of Indicators
One way in which novices misuse indicators is underutilizing them. Take RSI, for instance. Looking at most crypto TA on social media, you’d think that their only application is in analysing oversold pointing up/overbought pointing down setups.
However, you can use RSI in determining 70/30 entry/exit signals, placing midpoint value crosses, and establishing divergences. Moreover, it is handy in discerning failure swings and mapping trendlines, among others. Applying it only for one cause is a waste.
Single Indicator Dependence
Another misapplication is the reliance on a single indicator. Using one indicator is often inadequate. To avoid losses, you need at least one other indicator to confirm signals generated by the one you’re using.
Indicator Overkill
On the flip side, there’s indicator overkill. Too many indicators complicate your charts leading to analysis paralysis. As much as one indicator is inadequate, an excess of them leads to confusion.
Misaligning Indicators to Trends
Additionally, rookies fail to align indicators with market trends. Whereas some work best in trending markets others are fit for range-bound situations.
You’re courting disaster when using a trend following indicator in a volatile market. Similarly, indicators meant for trading in directionless markets often return a higher volume of overbought or oversold signals. Depending on them in that situation is inviting calamity.
5. Adopting a Rigid Trading Approach
Nothing is as fulfilling to a rookie as a TA strategy that’s worked bearing them profit. Funding “the one” strategy can be exhilarating. However, that shouldn’t inhibit them from trying out other methods that could turn out profitable too.
Varying TA Strategies Helps You Find Your “Right Mix”
Once you’ve got the hang of basic trading and the accurate mapping of support and resistance, it is good to explore different TA styles. This experimentation with various strategies helps you find your “right mix.”
For someone sold to Ichimoku Cloud and chart patterns, you might be surprised that using levels and swing highs/lows could be equally fulfilling. Knowing how to use all these strategies helps you plot their convergence points. Additionally, you can match the strategy to see how they stack up against each other.
Looking at Trades From “Borrowed Eyes”
Furthermore, experimenting with different strategies broadens your perspective. It enables you to look at trades “from the eyes” of other traders. This way, you increase your understanding of what they’re looking at and for in a transaction.
Final Thoughts
Crypto trading requires tact. The sheer volume of transactions makes the use of market analysis tools a necessity. Among the popular tools available to any trader are Technical Analysis. Their proper usage puts anyone on the inside track to profitability.
Nevertheless, the converse is true too. It’s imperative, therefore that one develops their mastery if they’re to reap the rewards.
This article has looked at five major crypto TA mistakes that beginners make. It has also given insights on how to best avoid them. Utilizing this information will help every other greenhorn avoid pitfalls that may make their foray into crypto regrettable.
So, which of these pitfalls did you fall for as a novice crypto trader? Let us know in the comments below!
