Candlestick charts have been around for a few hundred years, but they can still be very effective ways of trading in financial markets. One of the main reasons why they’re still so popular is they make it easier to analyze price action in a market.
In a quick look, investors can analyze in-depth numbers and information in a quick and easy manner. This is a main reason why the candlestick trading strategy is so popular.
At google we help you understand what the candlestick trading strategy is, as well as some of the pros and cons of using it. Not every trading strategy is for every investor, after all, so it’s a good idea to get familiar with the pros and cons before you start implementing it in your own investment strategy.
Pros of the Candlestick Trading Strategy
Here are some of the pros of the candlestick trading strategy.
1. It Gives You A Viewpoint That’s Psychological
People who trade in currency are influenced by emotions such as fear, greed and hope a lot of times. To wade through some of the psychological factors that go into it, it’s important to do a technical analysis.
A candlestick pattern can be integrated as part of your overall analysis, allowing you to see the market’s changes in value determination without being influenced by human emotions. The candlestick charts help to display the interaction that occurs between sellers and buyers, which is reflective in the movement or price a lot of times.
2. It’s Easy to Grasp
It’s very important to be able to make quick decisions when you’re trading, and candlestick charts help you do that. They provide easy patterns that are very clear to see, and are exceptionally accurate at the same time.
Using candlestick patterns in conjunction with other trading strategies and analysis can help you identify any emerging patterns in a market, helping you to jump on opportunities quickly when they arise.
3. It’s Detailed
There are many basic charts you can analyze when you’re trading, but candlestick charts are much more in-depth. They show full detail of price action in a particular market. When you analyze these charts over a specific period of time, you can use the analysis of patterns to help determine the future probability of certain movements in the market.
This is key to any trader, no matter what market you’re dabbling in. If you can quickly and correctly predict the movement of a market over time, you’ll be able to identify the good purchase opportunities, allowing you to get in low before a sharp increase — or avoiding getting in high before a sharp decrease.
Cons of the Candlestick Trading Strategy
Here are some of the cons of the candlestick trading strategy.
1. Its Patterns Can Be Different at Different Times
One of the biggest challenges of a candlestick trading strategy is the patterns can look very differently for different timeframes. In one period of time, the pattern can look formed perfectly, while on another, it can look the exact opposite.
When you have information like this that is so contradictory, it can be tough to trust what you’re seeing all the time — especially if you’re using multiple periods of time in your analysis. In other words, candlestick charts can actually cause doubt in traders’ minds, giving them pause as they’re trying to make a decision.
2. It’s a Lagging Indicator
The candlestick trading strategy is great, but you need to keep in mind that it’s a lagging indicator. In other words, the pattern is showing you what has happened already, leaving the trader to make their own speculative decisions about where the movements of price are going in the future.
To be truly effective, you have to wait until the candle closes before you enter a trade. Again, the main drawback of this is that it isn’t predictive, but rather reflective in nature.
Having a recording of the patterns that already happened is great, but it’s not a perfect predictor of what’s going to happen in the future. And, ultimately, what happens in the future is all that really matters when trading.
3. It’s Tough to Manage Risk
One of the biggest drawbacks of the candlestick trading strategy is that it can be tough to manage risk. Many people who trade using this strategy will enter the market when a candle closes. They’ll then place a stop loss when the candlestick is low.
The biggest problem with doing this, though, is traders won’t know when that next candle will come to a close. As a result, it’s tough to pre-plan using the candlestick trading strategy, which will ultimately impact your risk management strategies.
