What are the most common mistakes in technical analysis that rely too heavily on news cycles?

1 News-driven bias

One of the most common mistakes in technical analysis that rely too heavily on news cycles is news-driven bias. This is when traders and investors tend to focus on the latest headlines, rumors, or events that affect the market, and ignore or dismiss the underlying technical factors that may contradict or challenge them. For example, a trader may buy a stock based on positive news about its earnings, but overlook the bearish signals from the price action, volume, or momentum indicators. This can lead to false expectations, emotional reactions, and poor decisions.

3 Confirmation bias and hindsight bias

A third common mistake in technical analysis that rely too heavily on news cycles is confirmation bias and hindsight bias. This is when traders and investors tend to seek out or remember the information that supports their existing beliefs or opinions, and ignore or forget the information that contradicts or challenges them. For example, a trader may only pay attention to the news that confirms their bullish or bearish bias on a market, and disregard the news that suggests a different or opposite scenario. This can lead to overconfidence, selective perception, and missed opportunities.

4 Recency bias and anchoring bias

A fourth common mistake in technical analysis that rely too heavily on news cycles is recency bias and anchoring bias. This is when traders and investors tend to give more weight or importance to the most recent or the first information that they encounter, and neglect or underestimate the other or older information that may be relevant or significant. For example, a trader may be influenced by the latest news that affects the market sentiment, and ignore the long-term trends or cycles that may have a stronger impact. This can lead to short-sightedness, irrationality, and volatility.

5 How to avoid these mistakes

The best way to avoid these common mistakes in technical analysis that rely too heavily on news cycles is to adopt a balanced and disciplined approach that combines both technical and fundamental analysis. Technical analysis can help identify the patterns, trends, and indicators that reflect the market behavior and psychology, while fundamental analysis can help evaluate the intrinsic value, quality, and potential of the market or asset. By using both methods, traders and investors can gain a more comprehensive and objective perspective of the market, and make more informed and rational decisions.