Reading a Candlestick Chart? Avoid these 5 Deadly Mistakes

Candlestick patterns are a favourite of almost every technical trader. They offer a lot more than the standard line chart or bar chart. If you want to be a candlestick pro, these are the five mistakes that you should surely avoid.

Among all the different technical indicators available for trading, candlesticks are quite popular. Their ability to offer a detailed view of the stock market or stock goes beyond what you can get with a standard line or bar chart. Be it finding the right entry or exit, understanding market trend, or placing a stop loss, there are several ways in which professional traders use these charts.

If you’ve understood the benefits of candlesticks in trading and want to be a professional technical trader, there are also a lot of mistakes that you should avoid at all costs. Five of the most common ones are as follows-

  1. Misinterpreting the Pattern

Search for candlestick patterns on the internet, and you’ll find tens and hundreds of patterns that promise consistent results. While a lot of patterns are indeed very useful, most new traders end up misinterpreting the patterns. This often happens when a trader just blindly trusts the pattern without first understanding the candlestick basics.

It is not necessary for any pattern to turn out the same way as you’d expect.

  1. Not Considering the Market Trend

While patterns do help you know when to go long or short, a lot of traders do not consider the market trend when doing so. It is important to know that the patterns are all connected to the market trend.

If you do not consider the market trend, there is a possibility, for instance, to consider a hammer pattern as a hanging man pattern and pick the wrong trade.

  1. Trying to Understand every Trade

The markets are naturally noisier on certain days. Such days often do not help in understanding the price movements in future. Analysing the price behaviour generally helps when the stock or market is at major resistance or support levels. This means that you should first find these levels before searching for patterns.

Trying to understand every single candle on the chart will only confuse you and can also result in significant losses.

  1. Being Too Creative

With so many patterns out there, people often get too creative with the candlesticks. It is not necessary for every candlestick or pattern to have a meaning. No matter if you want to buy or sell, ensure that there is enough evidence backing your decision.

Keep things as simple as possible and step back if you see that things are getting too confusing.

  1. Only Focusing on Intraday Timeframes

It is very important to understand how an intraday candlestick chart fits into the bigger picture of monthly, quarterly and even yearly charts. For instance, if an intraday chart is showing that the stock would go up, but the stock is on a major downtrend in the monthly and quarterly chart, there is a possibility that it might not turn out as you expected.

Do not just focus on the intraday timeframes as there is also a bigger picture to take care of.

No one can be a candlestick pro in a matter of days. While it is good that you are trying to learn more about candlestick, never believe that any pattern comes with a 100% guarantee. Practice it for weeks and months to improve yourself as a trader and better understand how candlesticks work.

 

Author: Robin Gupta