Skip to Main Content


The 9 Deadly Sins of Technical Analysis That Chart Traders Commit Without Realizing

The markets are competitive, and any edge you have can be easily eaten up by making mistakes in your analysis. Here are a few of the most common mistakes that traders make and some suggestions on how to avoid them. Remember, trading is extremely risky, but there are things you can do to increase your odds of success. The best way to do this is to start by understanding the most common mistakes, what they are, how they happen, what you might be thinking when you make the mistake and build your system around avoiding it.

Getting excited and being afraid: FOMO and chasing stocks up

What happens: You pull up a chart, and it’s flying. Looks like it could keep going. Not wanting to miss out, you throw technical analysis out the window, no time, and jump in right away. Almost as if your order getting filled triggered it, price pulls back and you find yourself stuck in a trap. Oops.

Analysis: FOMO is by far the most common trading mistake — and probably the most written about. For that reason, we won’t spend a ton of time on it other than to say: don’t chase stocks that are flying. Wait for a pullback to a logical support level and some confirmation that it will hold. Then decide if you want to act or not.

Being inconsistent: Not having a consistent system for analyzing charts

What happens: You pull up your watch list and start looking at charts. You start out on the daily time frame, but when you don’t see something you like, you switch to hourly. Then you zoom in on the chart. You analyze what you see and then move on to the next symbol without resetting your charts. On this one, you change time frames a few more times and zoom back out before you spot a setup you like. Then you draw some trend lines and keep on plugging away.

Analysis: The problem here is you can’t expect consistent results from inconsistent analysis techniques. In other words: you can’t really tell if your approach is working or not if your approach is different each time. Avoid this trap by defining your analysis rules upfront. For example, when on a daily chart, agree with yourself to always use 12 months worth of candlesticks. Decide on your rules for drawing trendlines – do you use highs and lows, or opens and closes. Then stick to it every time.

Getting desperate: Signal Seeking Behavior (aka forcing it)

What happens: You’ve been looking at charts for hours and haven’t found anything that looks amazing. A few okay-ish setups, though, but they all concern you for one reason or another. Not seeing anything better, you pick one and jump in. It doesn’t go well.

Analysis: If you look for something hard enough, you’ll find it, whether or not it’s actually there. If you’re desperate for a trade, you’ll find a signal in a chart to tell you to trade it. And it usually won’t go well for you because it’s not as real as you want it to be. You should instead be patient. If you don’t see a trade you are confident in, you should just not trade.The best traders I know often skip entire market days when they don’t see anything they like enough to bet on. You don’t have to trade every single time you find a chart that looks OK and you don’t have to trade every single day at all. Sometimes it’s not what you do, it’s what you don’t do. Make a deal with yourself to only trade in optimal conditions and stick to it. Never force it.

Being romantic: Falling in love with a stock or company; confirmation bias

What happens: You’re a big fan of Tesla, you watch Elon Musk’s Twitter like a hawk, catch every SpaceX launch, and generally just think he is a rockstar… and you just know that Tesla is going to kill it. “Don’t bet against Elon” is your motto. So when you pull up the TSLA chart and analyze it, you almost always see something bullish, no matter what is going on. If the stock is pulling back, you think it will reverse soon. “It must just be profit taking” or “the algos/market makers are manipulating the market again”, you think. Or, on the flip side, you bought Tesla at the right time and now it’s flying sky high… part of you thinks the chart is telling you that it’s time to take profits, but you just know it will go higher, so you decide to ignore the technicals that tell you otherwise. You believe in Elon. But the stock pulls back, and you end up giving back some of your gains before cashing out in the panic.

Analysis: We all have products and companies we like. That doesn’t mean they’re good investments or trades. You need to be objective when analyzing charts, and separate the attachment you have to the brand from your analysis of the price action. The trick is being honest with yourself. Some traders I know just avoid such stocks in general. One is a big fan of Apple and because of that he doesn’t trade Apple. He just owns it, instead. Yes, buy and hold. That way he can participate in it without trading in and out of it as much. If you love Tesla, buy a few shares and hold onto them for better or worst, but don’t try to technically trade it if you’re going to have a hard time getting out of it later.

Having tunnel vision: Only looking at one time frame at a time

What happens: You crunch the 5-minute chart, see a nice setup and dive in. Then it goes against you. Why? Because on the 60-minute chart, price was right up against the upper bollinger band, or a trendline from the daily chart. You just didn’t notice it.

Analysis: Not many traders are able to digest the price action, indicators, trendlines, fib levels, etc. from more than one or two time frames at a time. As a result, most traders limit their analysis to their few favorite, for example 60 minute and daily charts. This is where doing the leg work can really pay off. Pay attention to a wide range of timeframes, and remember: price action is more likely to respond to longer-term trends than shorter-term ones. Look at the forest and the trees, not just one or the other.

Getting trigger happy: depending on a single signal, & not waiting for confirmation

What happens: You can see that RSI is oversold and the stock is down, so you decide to buy while you can, before everyone else (especially the infamous  “algos”) catch on. But no one else catches on, and it continues to sell off.

Analysis: Depending on a single indicator or trading signal is risky. Just don’t do it. If something looks good, look for other, unrelated, things about the chart that also look good. Confirmation, confirmation, confirmation. The more, better. If trendline support is backed up by moving averages from multiple time frames, and RSI also aligns, then that’s a stronger setup than any of those things alone. Remember, strong confirmation can come in many forms, from a complete candlestick formation to a pullback & bounce, to a second indicator… the point is, don’t put all your eggs in one basket when it comes to analysis.

Getting stuck: Not having a clear exit strategy

What happens: You got in at the right time, and the stock is running nicely. You’ve got a great gain, and you want to hold out for more, so you decide to hold. The next day it gaps down and sells off on news, back to where it was, or worse.

Analysis: A lot of traders end up bag holders even after they were right, because they thought the stock was going to keep on running. There is a simple way to tell if you’re doing this: just ask yourself the following question about every position you’re holding as often as you can: Would I buy in right now? The moment the answer becomes a no, get out.

Being skittish: Using stop losses as a primary safety mechanism

What happens: You’re trying to be smart and set a stop-loss directly under the support line. Then it hits, you take a small loss, and walk away, thinking you dodged a bullet. Later, you look back and see that your original plan panned out and it was just a momentary low-volume sell-off that kicked you out of the trade. What gives?

Analysis: I won’t bash stop losses too much because they have a place, but that place is not anywhere near your primary support or resistance line. Set a stop loss too high and you’ll get tailed out, set it too low and you’ll get crushed at the end of the pullback. Instead, use stop losses as an emergency break, at the point of no return, and use price alerts to keep an eye on key levels. When something scary starts to happen, wait for confirmation before panicking: let the candlestick close, check other indicators, and see what the fib levels are. Remember, a pull back is sometimes normal before a continuation. The market loves to shake out weak hands by faking them out. Keep that in mind at all times.

Chasing losses: gambler’s mentality

What happens: You’re not having a good day but you just know it will turn around. Yet, trade after trade goes against you. Yea, you win a few here and there, but you’re getting out too early. After a while, as the losses are pile up, your bets start getting bigger. You’re chasing your losses and losing the race. At the end of the day, beat up and demoralized having booked some nasty losses.

Analysis: Knowing when to stop is important. A lot of great traders I know have rules to prevent this from happening. One excellent trader will stop trading after three losses in a day. He’ll go fishing, and come back the next day refreshed and relaxed.

BONUS Deadly Sin: Being aloof: Not paying attention to their charts

What happens: You got in at a good time, things looked good, and then your phone rang. Your friend wants to grab a beer later and maybe catch a game next week. While you’re talking, the chart reverses and pulls back. You don’t even notice until you hang up.

Analysis: A phone call is just one example. In modern days, we’re surrounded by distractions. Literally, everything and everyone is fighting for every moment of our attention as consumers. We get email notifications, Twitter notifications, breaking news alerts, Facebook messages, text messages, robocalls, not to mention, family, kids, day jobs, vacations, etc. Distractions play out on all time frames, and even swing traders I know get busy and forget to watch their charts. The trick is to always force yourself to pay attention. If you swing, set a time each day to review your positions. If you scalp, well, keep that nose to the screen when you’re in a position.