Candlestick charts are very popular in the trading world, helping traders visualize the activity on any asset over a specific time period. Many traders around the world trust them and rely on different candlestick patterns to make money. However, there are times when candlestick charts don’t work.
Candlestick charts fail and don’t work in extreme volatility (high or low) and choppy market conditions. Additionally, how a trader reads and incorporates these chart patterns into a comprehensive trading strategy further impacts the reliability of these charts.
This article will walk you through the main reasons that cause the candlestick charts to fail. Further in the article, we’ll also cover how you can improve the reliability of these charts and make them work for you in the majority of trading scenarios.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
What Are Candlestick Charts?
Candlesticks charts are used in the financial markets to analyze price movement for any tradable asset. Also known as Japanese candlesticks charts, they show the open, high, low, and close prices for an asset over a specific period.
Each candle represents a timeframe typically ranging from one minute to one month. Different trading platforms may offer you different time periods to work with, but the results are often very similar. To use candlestick charts in decision-making, traders often pay attention to a few candlestick chart patterns.
5 Reasons Why Candlestick Chart Patterns Don’t Work
Listed below are the five main reasons that reduce the reliability of candlestick chart patterns for most traders:
Extreme Volatility
If your trading is based around a few candlestick chart patterns, the information in one candle can get greatly distorted if a high-volatility event occurs during the trading session.
For example, strong economic numbers released shortly after a candle pattern of interest can render the previous analysis moot. Similarly, a candle formed within the release period may contain a lot of noise. Any trading decision based on this candle is less likely to deliver the expected results.
Tight Ranges and Low Volatility
Like extreme volatility, the opposite side of the coin can negatively affect traders using candlestick charts. Tight ranges often lead to slippages and disjointed price action. Therefore, any candlestick chart information from this period will be influenced by disjointed price action.
Wrong Application
Candlesticks charts are just another tool in the hands of savvy traders. Traders without the right skills may use them incorrectly, rendering them ineffective. For instance, the best candlestick chart traders emphasize trading a confluence of signals. A trade entered because of a single candlestick chart pattern is likely to fail compared to one entered after a pattern formed at a critical support or resistance level.
Lack of a Strategy
Using candlestick charts in your trading won’t work in a scenario where you enter trades at random, chasing every pattern you can recognize. The best candlesticks chart traders will first settle on a few chart patterns to look out for and then create a strategy around them. The strategy should cover everything, including entries, exits, and money management.
Wrong Expectations
Newcomers to trading often show too much belief in candlesticks charts and price action strategies. This may be due to the hype surrounding these strategies and how they are heralded as the best way to trade in trading communities. However, as mentioned above, candlesticks charts are just a graphical representation of the trading activity on a trading platform over a specific period.
The captured data only reflects the trading activity with a specific broker or market maker pool. Like other strategies, no candlestick chart pattern is infallible. The best strategies will only be right around 50-65% of the time. Having the wrong expectations from candlesticks chart trading will lead to poor trading decisions and poor results overall.
How To Make Sure Candlesticks Charts Work for You?
To make the most out of candlesticks chart trading, here are some tips to keep in mind:
Create a Robust Strategy
As mentioned briefly above, you need a proper strategy to ensure that candlesticks charts work for you over the long term. Jumping in and out of trades based on how you feel about price movements is the wrong approach.
Make a list of chart patterns to watch out for and stick with them. Don’t attempt to trade everything. You can focus on hammers and dojis or inside candles and engulfing patterns. For most trading strategies, two to three patterns are enough. Finally, with your strategy in place, run a comprehensive backtest to ensure it holds a statistical edge before deploying it.
Pay Attention to Volume
In trading, the volume captures the number of lots or contracts traded within a specific period. It is measured by time frame, like candlesticks on a chart.
Most trading platforms have a bar indicator that shows the volume for a specific candle. High volumes are a sign of considerable activity in the specific time window, while low volumes show the opposite.
The best candlestick chart traders avoid making trading decisions when volatility is at extremes (too high or too low). Always wait for the market to settle before you get on board to reduce the probability of entering into a corrective market phase.
Entering a position during extremely low volumes can lead to an unnecessary accumulation of trading costs. Signals formed during this period are also likely to be false dawns as the price action will be choppy and inconsistent until the volumes start to recover again. So, for the best results, wait for consistent and robust volume on the asset you intend to trade.
Confirm the Market State
The market situation is the current price action for any asset. Understanding it is vital for the success of candlesticks chart trading. Are you in a strongly trending market? Is the asset moving in a tight range? Did the market pause around a major confluence zone and show signs of reversal? These are questions you should ask yourself when determining the market state.
By understanding the predominant price situation, you can make trading decisions with a higher chance of success.
Don’t Trade Without Confirmation
Experienced technical analysts don’t trade candlestick chart patterns alone. They often confirm a potential trade decision with other indicators or check to see if the signal is around a zone of interest. For example, trade signals formed at support or resistance zones often hold more promise. Taking all signals on a candlestick chart without confirmation will yield many low-quality entries.
However, it’s a thin line between seeking confirmation and analysis paralysis. If your confirmation strategy hampers your decision-making, you need to re-evaluate the parameters.
Stay Disciplined
One of the first things you’ll learn as a trader is that strategies are only as good as the traders applying them. You need to adhere strictly to any strategies you create for trading candlestick charts. Be sure to take all qualifying trades and exit when the strategy dictates. Don’t second-guess or cherry-pick entries to honor as well as ignore.
Trading successfully with a solid strategy is all about allowing the odds to play out. If your trading strategy has a real edge, you should come out on top over time.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
- Roadmap to Becoming a Consistently Profitable Trader: I surveyed 5000+ traders (and interviewed 50+ profitable traders) to create the best possible step by step trading guide for you. Read my article: ‘7 Proven Steps To Profitable Trading’ to learn about my findings from surveying 5000+ traders, and to learn how these learnings can be leveraged to your advantage.
- Best Broker For Trading Success: I reviewed 15+ brokers and discussed my findings with 50+ consistently profitable traders. Post all that assessment, the best all round broker that our collective minds picked was M1 Finance. If you are looking to open a brokerage account, choose M1 Finance. You just cannot go wrong with it! Click Here To Sign Up for M1 Finance Today!
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Conclusion
Candlestick charts are an important tool in the arsenal of any trader who relies on technical analysis. They present traders with a complete picture of the price action happening on the price chart of an asset. Hence, strategies based primarily on looking at the formation of candles across the chart are known as price action strategies, one of the most popular methods of technical analysis.
However, like all other methods of analyzing the markets, candlesticks charts are not 100% failsafe. You’ll have winning and losing trades. Success with the charts comes down to the robustness of the trading strategy and your overall ability to consistently trade with it.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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