Use Candlesticks to reason with Ego
Most traders do not buy a stock again if they have suffered a loss in it in the immediate past. Why? Ego. Humans are egoistic in nature. We take a loss very personally. Instead of considering a loss as a failed trade, we attribute the loss to ourselves. Consider the negative emotional state one goes through upon suffering a loss in one of the trades. Our mood gets finicky, we curse ourselves for not listening to our 'inner voice', and try to find reasons we shouldn't have taken the trade in the first place. No consideration is given to the fact that the trade was generated by a well-thought of system which encompasses some losses as part of the strategy.
Now consider that the stock again gives a buy signal. The price is higher now than what we sold for a few days back. Wouldn't we look foolish to buy back the stock at a higher price now? Why didn't we just hold it in the first place? To buy it now would be a big blow to our trading ego. So we pass a perfectly good opportunity away.
Knowledge of candlesticks and what the formations mean can give traders the confidence to get back in a stock if it is shows a reason to get back in. Candlestick formation analysis can be a powerful tool to reason with one's ego. Notice the chart of BANKINDIA below. Upon seeing the first Bearish Harami and getting confirmation 3 days later, a short position should have been executed. Two days later however, the stock gap gapped up above the Harami and the trader should have been stopped out of the position. By the end of that day, the stock formed a Dark Cloud signal indicating bears had seized control. This is where most traders shy back and do not take the trade, even though the latest signal gets confirmed the next day. Candlestick analysis build up the confidence to enter the short trade knowing that the bulls psychology has been dented and the bears have a higher probability of continuing the downtrend this time around.
Chart courtesy icharts.in