Any trader may be a beginner or a professional, the very first thing he does while analyzing a stock is analyzing its price chart. Now price chart is in the form of a bar chart, line chart, points and figure chart and the most used and reliable form of the chart that is candlestick chart.
Yes, the most reliable chart. The best part of a candlestick chart is that it not only shows a good amount of information but also the psychology of the market.
The four basic information are open price, closing price, high and low.
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Anyone who knows these basic elements of a candle will able to read candlestick chart, but will not be able to interpret them.
This is the most important part of analyzing candlestick chart. In my early stage of learning, I used to look at a candlestick and observed how the price fluctuated throughout a day.
But I missed few key signs that candlestick chart can represent until now that helped me not only to analyze what happened in the past but rather became more helpful to analyze what is going to happen in future.
But to read and understand all the consequences that a candlestick graph can make, you must know the things you have to look out in the chart.
The 5 critical things that are usually missed while analyzing a candlestick chart are:
1)Psychology of buyers and sellers:
This the most vital part of candlestick chart. If you understand this you understand the market, after all the market runs on market sentiments. And candlestick helps you to analyze the real tension between the buyers and the sellers.
Who is dominating the market today? And who will be dominating it tomorrow?
The price action that is shown by candlesticks give information behind the scene, the sentiments, which can show who is favoring the market to grow or drop and what is going to persist in future. Each candle says something about the war going between buyers and sellers.
All you need to do is train your eyes so that if you observe the chart you can interpret what the market wants to tell about the perspective of buyers and sellers so that you can decide which queue you need to stand.
In my subsequent article, you will find the types of candle that will ensure the future behavior of the market. Stay tuned to get recent updates.
2)Reversal of trend
The price chart is the only source where you can identify the trend that the market is following. But with the candlestick, you can also predict that the trend would persist or change.
This is the key feature of the candlestick and if you identify the trend reversal in right time you can ensure your profit without any risk.
The above figure explains one of my experiences at the early stage of trading. As I said, earlier I used to check the four basic information given by candlestick and missed the critical signs such as trend reversal which caused me to suffer a huge loss.
If I would have understood that the trend will change I could have made an exit from the market, rather I made an entry and my stock price fell down.
I guess if you learn from my experience you won’t suffer from such misleading price actions.
The very next day I explored and learned how the reversal of trend can be identified and covered all my loss which you can see from the image below.
Along with candlestick if you use technical indicators that make you conform regarding the price action what is going on in the market, then it will help you lead the market.
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3) Time for entry and exit
Time is the mystery of market. Most of the times it happens that when we trade we regret our timing decisions. But as it is said you need to have faith and believe in a good time rather than chasing for a better timing.
Candlestick patterns can also help you to judge the ideal time to enter or make an exit from the market.
As shown in above case of mine how an improper interpretation of chart can misguide you to analyze and judge the price actions in the market.
Candlestick itself can represent the fight of buyer and seller and as there is a fight there will be someone who wins and the other one loses.
If you can interpret this you won’t choose the side of a looser.
And will inline your time with the side of market winners who are dominating the price fluctuations.
Use market timing strategy with candlestick reading to ensure proper entry into the market.
4) Volatility of market
Market volatility is when the traders either get excited or nervous with the stock price variations. High volatility makes price fluctuation so much that traders get confused.
What will you do when the market makes a high and a low on the same day.? Anything can happen, This is the reason why risk takers stay in the market while fearful traders leave.
Here also candlestick can help you if you can identify the whole process of trading and who is dominating the market.
Yes, candlestick can help you analyze what is going on in the mind of traders and price actions can show you what you need to do
You can see how a stock gets volatile. With huge price rise in a single day, the market shows price drop in subsequent days. This makes traders speculative. Intraday traders can make profit from such scenarios using momentum investing strategy
5) Do nothing but wait.
There is a time in the market where all you need to do is wait and do nothing unless you find any signal to make an entry in the market.
This happened to me when I found a suitable price to make entry but after that, the chart pattern was something like shown below.
You can see that there is no proper rise and neither a fall of price. The market here is stagnant and moving horizontally. If you are caught in such situation you cannot make an exit as there will be no profit and your time gets dissipated.
Candlestick is the most commonly used graph pattern around the globe. It has many hidden signs and notations that are not available with any other form of technical analysis.
But make sure you are very confident with your analysis. The ideal way is to use technical indicators along with chart patterns to ensure your assumptions are in right direction or not.
Just remember the market is very uncertain and has the potential to make you lose even your principal amount.