Beware of the green candle trap 🚨
In the world of trading, Japanese candlestick analysis is one of the basic tools that investors rely on to make buying and selling decisions. While many see green candles (which indicate a rise in price over a certain period of time) as a positive sign, not every green candle is necessarily an ideal buying opportunity. So what are the reasons behind this?
1. Timing is not always right.
Green candles may reflect a temporary or short-term uptrend. The stock or asset may be in a volatility phase, where the price rises for a short period and then falls again.
Without a thorough analysis of the overall market context and past price action, entering on a green candle may be a risky venture.
2. Green candles may come after a period of decline.
Sometimes, a green candle appears after a series of red candles that indicate a significant decline, and this may be known as a “technical bounce.” Although the price has temporarily risen, the overall trend may remain bearish.
In such cases, a green candle may be a temporary opportunity and not an indication of a positive trend shift.
3. Market inflation and price manipulation
There are instances in the markets where large amounts of liquidity are pumped in to push prices higher, producing a series of green candles but not reflecting the true value of the asset. This could be an indication of price manipulation.
Entering into this type of rally could expose the investor to significant losses if the market is manipulated and the asset is suddenly abandoned.
4. The importance of studying multiple patterns
Many successful traders rely on analyzing recurring technical patterns such as the “double top” or “double bottom” pattern that provide stronger indications of a trend reversal.
A green candle may be one of several candles confirming the trend, but it cannot be relied upon alone.
5. Consider other indicators
Successful buying decisions rely on incorporating a range of indicators, such as volume, RSI, MACD, etc. These indicators can provide a deeper understanding of what is happening in the market than relying solely on the color of the candle.
For example, if a green candle appears with low trading volume, it may be a signal that the rally is not strong or supported by sufficient liquidity.
Conclusion: 🫰🫰
Seeing a green candle may be tempting and make the investor feel optimistic, but it is not in itself a buy signal. Investors should study the general market context, analyze several indicators, and understand the technical patterns of candles to achieve better investment results and avoid getting involved in unprofitable trades.