A No-Confusion Approach to Reading Charts
And how to take guesswork out of your technical analysis.
Do you know the biggest factor that stops you from making better trading decisions?
Its subjectivity in the chart based technical analysis.
As someone transitioning from a corporate job to trading, I realized how crucial it is to make informed decisions. And reading charts objectively was a big challenge. But once I perfected the skill to read charts objectively, I started making consistent, emotion-free decisions, leading to better trades and more profits.
The Problem: Subjective Chart Reading
Many new traders fall into the trap of subjective chart reading.
The Causes:
Emotional decisions: Fear and greed can distort your view of patterns, leading to mistakes.
Inconsistent analysis: Without clear criteria, you might see different patterns in the same chart on different days.
Overconfidence in "gut feelings": Trusting intuition over data can result in impulsive trades.
Analysis paralysis: Struggling to choose the "correct" pattern among many possibilities.
Confirmation bias: Seeing patterns that confirm your pre-existing ideas, ignoring contradictory data.
Fortunately, there's a way to overcome these issues.
Let's explore how you can turn your chart analysis into a reliable tool.
Objective Chart Reading: Steps to Consistent Trading Decisions
Step #1: Quantify Your Patterns
Define specific, measurable criteria for each chart pattern. This removes guesswork.
For instance, instead of vaguely identifying a "bullish trend," specify: "A bullish trend is confirmed when we see three consecutive higher highs and higher lows on the daily chart." This clarity eliminates ambiguity. Imagine you're analyzing the NIFTY INDEX chart. With this definition, you won't be swayed by a single green candle; you'll wait for that clear, three-part confirmation.
Quantifiable criteria lead to repeatable, confident decisions.
Step #2: Keep It Simple, Trade It Smart
Complex analysis can be your worst enemy. Keep your criteria straightforward.
For example, a head and shoulders pattern: "The pattern is confirmed when the neckline is breached by a candle close, with volume at least 1.5 times the 20-day average." Apply this to the chart. No more debating shoulder heights or head roundness. Just neckline breach + volume spike = actionable signal.
Simplicity breeds clarity, and clarity breeds confidence.
Step #3: Make It Unambiguous
Your criteria should account for all possible price movements, leaving no room for "maybes."
Take the bearish engulfing pattern. Define it clearly: "A bearish engulfing occurs when a green candle is fully engulfed by the next red candle, with the red candle's volume exceeding the green's." Now, analyze the chart. You’ll never confuse it with a ‘inside bar’ or wonder if it’s "engulfing enough." It either meets all criteria or it doesn't.
Unambiguous rules eliminate second-guessing.
Step #4: Focus on Key Patterns
Prioritize patterns that identify trends - the lifeblood of profitable trades.
Master swing highs and lows, and support and resistance zones. For swing highs: "A swing high is a candle with at least two lower highs on each side." Apply this to the chart. By focusing on these key trend indicators, you'll spot the big moves that matter, not just noise.
Trend is your friend; make identifying it your top priority.
Step #5: Choose Your Tools Wisely
Your analysis is only as good as your data. Choose a reputable charting platform.
TradingView, with its comprehensive historical data, is a go-to for professionals. Broker platforms often display snapshot data, missing crucial price action. Imagine missing a key support level on your BANKNIFTY analysis because your broker's chart didn't show last month's dip! Reliable data is the foundation of reliable analysis.
Quality data yields quality insights.
Step #6: Stick to One Timeframe
Multi-timeframe analysis can lead to conflicting signals. Stick to one timeframe for clarity.
If you're a swing trader, commit to the daily chart. When analyzing NIFTY, you won't be tempted by a "bullish" 5-minute pattern in a daily downtrend. This single-timeframe discipline keeps you aligned with your strategy's timeframe and the prevailing trend.
One timeframe, zero confusion.
Turning Objective Analysis into Trading Triumph
By quantifying patterns, simplifying criteria, eliminating ambiguity, focusing on key trends, using quality data, and sticking to one timeframe, you've turned chart reading from a subjective art into an objective science. This isn't just theory; it's your new trading reality.
Imagine the confidence you'll have entering a trade, knowing your bullish engulfing signal isn't a whim but a data-backed decision. Picture the stress you'll avoid by not second-guessing your analysis of support levels. This is the power of objective chart reading.
Your journey from corporate life to trading success just got shorter. Armed with these strategies, you're not just hoping for financial growth; you're engineering it, one objective trade at a time.
Happy (objective) trading!