Warning: Following my trades may be hazardous to your financial health. See Disclaimer.

Tuesday, April 24, 2012

One Pitfall In Technical Analysis

First one must realize that all indicators are not reliable.  So even there lies a pitfall:  Marrying to your indicators.  Don't marry to any indicators, much less a "leading" indicator!  When price action is not doing what the indicator indicates, either bail out of the trade or stick to your stops.  Indicators are good for timing entries and exits - in case they are right!!

But that's not what I planned to write about.  The one subtle pitfall is that when you knows quite a few technical indicators, it is easy for you to selectively tune in to some and shun others depending on your emotional bias.  Take ZNGA as an example, my original set up was to add at 176% Fib extension, but because of an intraday high volume break of an intraday resistance, I front-ran my setup and went long.  Now its below my entry but should I now fall back to my original plan?  

Another example is more common.  Let's say you went long on TZA gap support, and it failed. Instead of taking loss, you saw the 20 MA not far below so you held on.  It failed.  And instead of taking loss, you saw the 50 MA and the 50% Fib just below as confluence of support so you held on.  Sounds familiar?

You see, it doesn't mean it would go against you all the time, but it's just that it would get you into bigger trouble than otherwise.

STO is oversold, but RSI is not.  What do you do? Price is bouncing, but no positive divergence.  What do you do?  Trend line break, but no volume. What do you do?  Price break all supports but there is a strong MACD positive divergence.  You see, you can easily jump the gun on any indicator while it is in fact premature.  Yes, trading may be an art, but that lack of rigid rules is reserved for the masters.  The rest of us have better learn the rope and stick to a set of system and rigid rules and live to trade another day in order to someday master the art of trading.  If you can't blame failures on one system/setup consistently, then you probably have fallen victim of the aforementioned pitfall.

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