Violent Candle Syndrome

You are tracking a stock. You just got in it, anticipating an upward movement. And suddenly, this happens:

A violent red candle. “It’s gonna crash now” is the first thought that pops into your mind. A red dagger into the heart of your profit hopes. “Sell, sell, sell!”

And then you sell. Maybe even if your stop is lower than this. Because, to hell with it, the trend just turned and I’m gonna beat the market here, right!?

Thirty minutes later, you find yourself looking at this picture:

How to survive those sudden spikes

Trading on 1-minute chart is fine if your strategy requires this. However, there is a psychological correlation between your chart zoom level and adhering to the pre-defined rules.

The more zoomed in you are, the clearer you need to be about where your stop is, and most importantly, where it is not.

The price kung-fu you see on high-resolution charts requires the same level of composure as staying cool in a fistfight.

To win, you have to ignore all the noise and stick to the plan and your skills.

The other option is to zoom out. Looking the same price action at a much lower time resolution provides a completely different perspective.

Here is the same price action on a 30-minute chart:

Actionable takeaways

The market doesn’t move in straight lines. Quick up and down spikes are liquidity grabs that keep the trading market alive.

If you zoom out to an hourly chart and look how many meaningful crashes or squeezes there actually are, then it’s about as frequent as a lunar eclipse. Trends last for months.

How to overcome emotions caused by sudden price spikes:

• Zoom out. Even if you operate on a 1-minute chart, zoom out to hourly or higher when a spike occurs. This immediately helps to cool down the emotions those spikes create.

• Know your stop-loss. Have a SL set (either as an order or mentally), and stick to it. If you have a workable strategy, you will be fine.

• Remember your plan. You had a trade plan before entering your position. Stick to it. If you didn’t have one, close your position and make one.