Candlestick analysis is a handy technical tool for providing nuance and insight into stock price patterns, but traders should avoid five key mistakes.
Candlestick patterns have long been a favorite tool of many technical traders, offering a more nuanced view of a stock or market beyond what you can see in the garden-variety bar chart or minimalist line chart.
Yet there are dozens, if not hundreds, of variations in candlestick patterns, and just as many, if not more, interpretations of what they may indicate. That means it’s important to grasp a few basics and understand that candlestick analysis really comes down to one thing: price behavior.
Candlesticks can help traders decide on potential price inflection points and opportunities over relatively short time frames, such as eight to 10 trading sessions.
Here are five mistakes that technical traders often make with candlesticks.
FIGURE 1: LIGHT THE WAY.
For the daily candlestick chart in this example, a higher closing price than the previous day has a green body, while a lower close is shown in red. To change charts to Candlesticks, log in to the thinkorswim® platform and click Style > Chart type > Candle. Chart source: TD Ameritrade’s thinkorswim® platform. Data source: NYSE. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.
Editor's note: This article was originally published in January 2015.
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