5 mistakes traders make in interpreting chart patterns

Chart patterns are the most important indicators traders use to craft their trading strategies. These indicators offer important information regarding asset prices in historical analysis so traders can make their own predictions. 

Numerous chart patterns signify either bullish or bearish trends. While treading them individually implies a steep learning curve, some patterns form groups, so traders must also analyze the market dynamic at another level. 

During learning, reading, and interpreting, traders can make mistakes, whether due to a lack of experience or different types of bias. While inexperience can be fixed, unlearning biases is quite difficult, as these predetermined ideas considerably influence one’s decisions. 

So, let’s find out what the traders' biggest errors are when reading chart patterns. 

 

Focusing too much on individual elements 

All chart patterns include a group of candlesticks whose meaning depends on their forms. While one candlestick can offer information about bearish trends, an additional three or four that form a pattern might mean something inherently different. 

Beginners make the mistake of searching for meaning in every single candlestick. Taking a step back and analyzing the bigger picture is always a good idea, especially when overwhelmed by panic or fear, which may expose you to poor decisions. 

For example, long wick candles can differ in interpretation if they’re either at the end of a downtrend or an uptrend, but two tall candlesticks that form at the end of a downtrend signify a trend reversal. 

Overdoing the market analysis 

While being wary of multiple sides of the situation and ensuring you’re covering the market analysis through thorough research, overdoing it is also a mistake. For example, overloading indicators can become confusing at some point and can lead to conflicting signals. 

At the same time, too much analysis can make you hesitate upon making a decision and lose many opportunities. This can happen when you’ve expanded your trading portfolio, so it’s a regular occurrence for traders. 

As you gain experience and become more confident in your knowledge and skills, you’ll be able to judge market conditions, chart patterns better, and decide whether to reallocate your assets. 

Not prioritizing stock volume 

Chart patterns include stock volume trends that offer insight into the number of shares traded on the market. This indicator is important because the market is more substantial when the volume increases. This usually benefits day traders, as they combine volume and liquidity data to set their next step. 

However, volume verification is one of the most underrated aspects of trading. Users are affected by misinterpreting market indicators. Volume analysis helps determine the level of conviction from price movements. 

Low trade volume breakouts can showcase a false movement, but a big volume is more likely to provide lucrative management results. 

Relying only on chart patterns 

Chart patterns are essential tools for predicting price dynamics and adjusting your portfolio. However, relying on them alone is insufficient to make an objectively informed decision. That’s why you should consider chart pattern analysis as an extension of your trading strategy that goes along with: 

• Fundamental analysis helps determine and assess intrinsic value based on quantitative and qualitative factors; 
• Sentiment analysis includes investor behavior and market mood based on factors like the Fear and Greed Index; 

Understanding an asset’s history, its driving value, and people’s sentiments about it is a complete strategy for deciding whether the stock is worth the shot or not. 

Being affected by FOMO (fear of missing out)

Emotions might hinder the final decision regardless of how well you read the chart patterns. For example, if you’re panicked and see a slightly bullish pattern, you might be prone to panic-selling due to fear of missing out on an opportunity. 

The effects of emotions on traders are long-discussed, and panic trading is only one of the several occurrences that hinder people’s true potential. Another issue is overconfidence, where traders trust their analysis and skills too much. 

Finally, confirmation bias makes people trust only their preexisting beliefs and ignore contradicting facts when faced with new concepts. 

Learn to prioritize more reliable chart patterns 

Avoiding the mistakes discussed below is essential, but so is being fast at identifying some chart patterns that are considerably important: 

• Head and shoulders start with an upward movement followed by a price peak and end with a downward trend. The pattern indicates a reversal of a price trend;
• Double top and double bottom reveal assets that climb in price and then abruptly fall back twice, which forms the “M” letter;
• Triangles, whether neutral, ascending, or descending, can showcase patterns of bullish, bearish, or inconclusive market dynamics; 
• Cup and Handle looks exactly as the name suggests and shows signs of bullish trends as it’s expected the stock will return to the upward dynamic after the consolidation period;

How to make fewer mistakes in trading 

While mistakes are beneficial up to a point, as they increase your experience level and expand your skills, they are costly in trading. Therefore, being cautious is always a good idea, but how can you reach that level of confidence to know when to stop trading and open your positions again? 

Luckily, you’re not alone as a trader. Technology is on your side; you should leverage it to the fullest because experienced traders are highly competitive. Lately, many traders relied on artificial intelligence for thorough analyses of the market and research, but be wary of AI bias and potential mistakes. 

Finally, whatever you do, don’t risk more than what you can lose. A six-month fixed-rate savings account is necessary when you start trading because, in case of a massive loss, your living expenses are still covered.

What are your trading mistakes? 

Everyone makes mistakes in trading, but it’s essential to learn from them and minimize errors that could cause us significant losses. For example, overlooking the bigger picture in chart patterns, overanalyzing, or not extending your strategy to technical analysis can set you up for failure. That’s why you must master popular chart patterns and take advantage of technology for personal analysis and risk management.