Have you ever encountered such an upsetting situation?
The candlestick pattern looked particularly good, with a breakout of the resistance level on high volume and all indicators looking positive. I excitedly entered the market, only to find that the price immediately reversed course and I was trapped.
You repeatedly review the market, study indicators, practice candlestick charts, and keep a close eye on trading volume. You spend four or five hours a day watching the market and learning a lot of techniques, but your account still keeps losing money.
Many people eventually wonder: Is this technical analysis system itself useless?
Actually, it's not that your skills are lacking; it's that you're looking at the charts in the completely reversed order.
There is only one correct analytical hierarchy: Trend > Position > Pattern > Volume > Breakout Confirmation
If the previous stage is not met, then no matter how good the subsequent chart looks, it is most likely a bull trap drawn by the major players.
This article is for popular science purposes only and does not constitute any investment advice.
First, the vast majority of stock investors start by looking at the market in the wrong order.
Let's start by talking about the most common operating habits of ordinary people.
Most retail investors, when analyzing the market, first look for attractive candlestick patterns, such as double bottoms or breakouts from trading ranges; then they check if the trading volume is increasing; as soon as they see a breakout with increased volume, they immediately prepare to take action.
In short: look at the breakout first, then the volume, and only then give a cursory glance at the trend.
I have seen a review of data compiled by a domestic institution, which counted over 12,000 A-share stocks that showed a "volume breakout pattern" in the past 5 years.
If you don't distinguish between trends and positions and just enter the market based on a breakout, statistically, only 31% of those who enter will be profitable in the long run. More than 70% of the signals turn out to be false breakouts, and it's easy to get trapped if you enter the market after that.
However, if you prioritize selecting stocks that are in an upward trend and at a relatively low price, and then look at the chart pattern, volume, and breakout confirmation, the probability of making a profit will increase to 62% even if it is still a breakout signal.
The difference doesn't come from the indicators, but from the order in which the market is viewed.
Many people have put the cart before the horse, making "breakthrough confirmation" the primary criterion.
Even in a downtrend, perfect candlestick patterns can still be drawn, and short-term volume surges can create the illusion of a breakout. Major players use attractive chart patterns to lure retail investors into buying in.
The underlying logic can be summarized in one sentence: the trend determines the overall direction, the position determines the level of risk, the pattern reveals the internal structure, volume distinguishes between genuine and fake funds, and a breakout confirmation is the final entry trigger.
If the previous condition is not met, all subsequent signals are of no reference value.
Second, the first level: Trends, which are the foundation of all analysis, should be placed first.
The trend, simply put, is the general direction of the market, and this is the first thing to determine.
Before analyzing any stock, the first thing to do is to look at the medium- to long-term trend and determine whether it is an upward trend, a range-bound market, or a downward trend.
An upward trend is characterized by continuously rising highs and lows, with the moving average system slowly moving upwards.
In a downtrend, the highs are getting lower and lower, and the lows are constantly moving down. Each rebound is mostly just a brief correction during the decline.
Many experienced stock market investors have a common saying: Don't rush to buy the dip and try to catch a rebound in a downtrend.
In a downtrend, even the most attractive candlestick patterns and the most impressive breakouts with high volume are often just rebounds with very poor sustainability.
Looking at historical market trends, statistics show that nearly 80% of breakout signals that appear in a clear downtrend are false breakouts.
Even if you occasionally make a small profit in the short term, it's easy to quickly give back those profits or even get deeply trapped if the market weakens again.
Conversely, in a medium- to long-term upward trend, even if there is a short-term pullback, the capital support is stronger, and the probability of a valid breakout is much higher.
The trend is a veto factor.
If the trend is wrong, no matter how good the subsequent chart pattern and volume look, just give up and don't waste time.
Third, the second layer: location, which determines the level of risk in this transaction.
After analyzing the trend, the second step is to assess the current position of the stock price.
The same candlestick pattern and the same breakout with high volume have completely different meanings depending on whether they are placed at a high or low position.
Location, mainly depends on two points:
First, how much has the price increased from the previous low point?
Second, how far is it from the resistance zone of historical trapped positions above?
If the stock price has already experienced a significant rise and reached a historical high, a large number of profitable positions have accumulated.
At this point, the breakout often occurs because the major players use attractive chart patterns to lure retail investors in while they quietly distribute their shares.
Conversely, after a sufficient correction and consolidation at a relatively low level, the overhead resistance is largely exhausted. A breakout from this level would face much less resistance from upward price movement.
It's important to clarify here that a low price doesn't guarantee a rise, and a high price doesn't guarantee a fall.
Position is only used to measure the risk-reward ratio. Entering at a high point carries a large potential for loss and limited potential for profit; entering at a low point allows for manageable losses and greater upside potential.
Many stock investors fall into traps because they ignore the entry and exit points.
If you rush in at a high price after a big surge and see a nice breakout, the risk-reward ratio will be unfavorable from the start.
Fourth, the third layer: Form, observing the internal structure of capital operation.
If the trend is right and the position is suitable, then we can look at the candlestick pattern.
Pattern refers to the candlestick structure of a stock price over a period of time, such as a trading range, double bottom, pullback, and consolidation.
The role of chart patterns is to determine whether funds are consolidating and shaking out weak hands within this range, or quietly distributing their holdings.
A good consolidation pattern typically involves gradually decreasing volume during pullbacks, with lower lows no longer being reached, and the trading range gradually narrowing, indicating a build-up of momentum.
The dangerous pattern is often that during the fluctuations, the highs keep moving down, the rebounds are weak, and each rebound is accompanied by a large volume of selling.
Here's a key point to remember: pattern is just a structural signal, and its priority is after trend and position.
Even if the pattern is perfectly formed, if it's in a downtrend or at a high price level, its reference value is greatly reduced.
The main players have a strong ability to create chart patterns; they can artificially create any candlestick pattern.
Ignoring trends and positions and blindly believing in candlestick patterns can easily lead to falling into visual traps.
Fifth, the fourth level: volume, distinguishing whether the price surge is genuine or a fraudulent manipulation.
The trend, position, and pattern have all passed muster; now let's look at the trading volume.
Trading volume represents the activity level of funds participating in the market. It is used to determine whether this abnormal movement is due to the entry of real new funds or the self-driven movement of existing funds.
When a genuine upward move occurs and breaks out, the trading volume will increase moderately, showing a significant improvement compared to the average volume in the previous period. This indicates that off-market funds are willing to enter the market, forming a consensus.
False breakouts often involve a brief surge in volume during the trading day, followed by a rapid decline at the close. This is merely a short-term speculative move by short-term funds, lacking sustained momentum. Such rallies are unlikely to go far.
Another scenario is a situation where there is a large volume at a high price level, but the price fails to rise. This is a typical example of a volume-price divergence , indicating a significant disagreement among investors and a higher probability of selling off their holdings.
Volume is a verification step, not the basis for judgment at the beginning.
Many retail investors immediately focus on trading volume, getting excited when they see a surge in volume, ignoring the trend and position. This is the problem caused by reversing the order.
VI. Fifth Level: Breakthrough Confirmation, merely the trigger for the final move.
After all four criteria—trend, position, pattern, and volume—are met, the final step is to wait for confirmation of a breakout.
A breakout, simply put, means that the stock price moves upward out of the consolidation range and stands above a key resistance level.
However, it's worth noting that a brief surge past the resistance level during trading does not constitute a valid breakout.
A more conservative approach to confirmation is to observe whether the closing price holds above the resistance level. Some traders will also observe the strength of the support the following day to confirm that it is not a one-day wonder.
A confirmed breakout is merely an entry signal, not a reason to buy.
Many people get the order wrong. As soon as they see a breakthrough, they rush in without looking at the four conditions mentioned earlier. It's like only looking at the trigger and not checking the barrel and the environment, which naturally carries a lot of risk.
Even if all the previous conditions are met, you should not blindly invest heavily after the breakout.
You still need to plan your stop-loss range in advance. If the market moves against your expectations, exit the market promptly to control your losses per trade.
VII. In light of the current market situation, how can ordinary people put these practices into practice?
The market is currently characterized by structural trends, with rapid sector rotation, inconsistent sustainability of hot topics, and numerous false breakouts.
During the review and screening process, we strictly followed this five-level sequence, checking each step one by one:
The first step is to look at the medium- to long-term trend; a downward trend can be ruled out immediately.
The second step is to assess the current position and be cautious about stocks that have been heavily speculated on at high levels.
The third step is to observe the candlestick pattern to see if it is a consolidation phase or a distribution pattern.
The fourth step is to check the trading volume to determine whether the funds are an increase in the market or short-term trading.
The fifth step is to wait for confirmation of a breakout, plan your stop-loss, and then consider using a small position to test the waters.
You must pass every step; if even one step is not met, you must give up the opportunity.
Don't force yourself to find reasons or meet conditions just to buy.
Many stock investors lose money because they can't resist the urge to trade.
Seeing even the slightest unusual activity, they rushed in, skipping the first four layers of screening and getting stuck at the very last step.
Even if you occasionally win by guessing correctly, the probability of losing money in the long run is very high.
8. Several common mistakes to make with this sequence
Myth 1: If the chart pattern is perfect, the trend can be ignored.
Many people are obsessed with candlestick charts, and they get excited when they see double bottoms or breakouts from trading ranges in a downtrend.
Remember, many seemingly attractive patterns within a downtrend are merely rebounds with limited upside and high risk.
Myth 2: High trading volume means investors are optimistic.
There are two types of volume surges: high volume at low prices indicates funds entering the market, while high volume at high prices may indicate funds exiting the market.
If you interpret volume without considering its position, it's easy to understand the reversal.
Myth 3: A breakout means the start of a new trend.
A breakout is merely a price movement; whether it can be sustained depends on the preceding trend, the price level, and the coordination of capital flows.
A single breakout signal has very little reference value.
Myth 4: Meeting certain conditions guarantees a price increase
This logic only improves the success rate of judgments; there are no signals that are 100% accurate.
The market is constantly affected by macroeconomic factors, news, and investor sentiment; any technical analysis can fail at times.
Summarize
Trend > Position > Pattern > Volume > Breakout Confirmation: This five-tiered order must not be reversed.
Trends determine direction, position controls risk, patterns reveal structure, volume distinguishes truth from falsehood, and breakouts identify opportunities.
If the order is reversed, even if you spend a lot of time studying candlestick charts and reviewing indicators every day, you are likely to repeatedly make mistakes and your account will continue to lose money.
Technical analysis helps us screen for high-value opportunities, not predict market trends. Respecting the market and managing risk are the keys to long-term survival in the market.
When you analyze charts, do you first look at the trend, or do you look directly at candlestick patterns and breakout signals? Feel free to share your habits in the comments section.
This article is for informational purposes only and does not constitute investment advice, nor does it recommend any specific stocks or provide guidance on buying or selling. The technical analysis is based solely on historical market data and cannot predict future market movements.
