Know These Potential Risks and Limitations of Candlestick Charting Unknown to Many Traders!
Candlestick charts are a visual representation of the battle between the bulls and the bears that takes place in the market. It takes time for this battle to take shape. Candlestick patterns on the very short timeframes used for scalping and some other day trading strategies may not give signals that can be properly interpreted and traded.
In the last decade, electronic trading has become highly popular. What this means is that a significant volume of the trading takes place outside of the regular market hours. This trading can cause patterns that don’t reflect the full picture to appear on a candlestick chart.
For example, stock ABC trades on NYSE. NYSE officially opens at 9:30 AM EST for trading. Stock ABC’s open price is $60 per share. However, this stock had been trading on the electronic network in the pre-market hours as low as $59. Now the open on the NYSE may not be a true reflection of where the stock had been trading initially on that day.
What this means is that the open recorded on the candlestick chart is not accurate.
Now, suppose the stock ABC never trades down to $59 during the day. So, the low on the candlestick chart may not be an accurate depiction of the day’s price action.
So, electronic trading makes these charts somewhat inaccurate. Couple this with the fact that on short timeframes, candlestick charts are not very accurate. These charts are good for timeframes of 1 hour and above. Just keep these two limitations of candlestick charts.
Apart from that candlestick charting is a powerful tool in the hands of an experienced trader. When an experienced trader combines these charts with technical indicators, this combination can produce highly accurate trading signals.
Candlestick patterns can be a good buy and sell signal when combined with a technical indicator like the RSI or the stochastic. There are simple as well as complex candlestick patterns. Singlestick candlestick patterns are easy to spot however, two stick and three stick candlestick patterns do not appear quite frequently but when they do, they are very accurate and can be highly profitable to trade!
Now Yahoo Finance is an excellent free resource that you can use to create candlestick charts for any stock by just entering the stock ticker symbol. You should play around with the options available for Yahoo Finance. This will help you to learn a lot of new things about candlestick charting.