Is candlestick analysis really useful? Understand practical techniques from W bottoms, M tops to moving average golden cross in one article

The first hurdle to entering the trading market is the endless list of technical analysis terms—“Golden Cross,” “Volume and Price Rise Together,” “Head and Shoulders,” “W Bottom.” But do these tools really make money, or are they just marketing tricks for “reading charts and telling stories”? This article will break down the core logic of candlestick analysis, telling you which techniques are truly practical and which are just smoke and mirrors.

What Is Technical Analysis Actually Analyzing?

The core belief of technical analysis is simple: history repeats itself, and price movements have already reflected all information (fundamentals, chips). Therefore, traders don’t need to study fundamentals; they can operate directly based on price trends.

The biggest advantage of this approach is flexible entry and exit, allowing for profit-taking or risk avoidance at the first opportunity. But the downside is obvious—when prices lack clear trends, they fluctuate randomly, causing signals to fail. This is why many technical traders fall into the traps of overtrading and lack of discipline (refusing to cut losses or take profits).

Based on the characteristics of price movements, markets can be simply divided into three types:

• Bullish (uptrend): prices continuously rise
• Bearish (downtrend): prices continuously fall
• Consolidation: prices fluctuate within a certain range

Candlestick Analysis: The Most Intuitive Price Recording Method

To understand candlestick analysis, first understand what makes up a candlestick. A candlestick (Candlestick Chart) consists of four values: opening price, closing price, highest price, and lowest price.

Colors represent the comparison of bullish and bearish forces:

• Red candlestick: Buyers are dominant; closing price is higher than opening price
• Green candlestick: Sellers are dominant; closing price is lower than opening price

A single candlestick can visually record a day’s price movement. Connecting multiple candlesticks forms a “candlestick chart,” allowing traders to instantly sense the market’s bullish or bearish sentiment. This is the most powerful aspect of candlestick analysis—simple and intuitive.

From Candlestick Reading to Pattern Recognition: How to Use W Bottoms and M Tops?

By classifying multiple candlesticks and identifying specific arrangements, you can form “patterns”—the source of the W bottom and M top often mentioned in media.

Pattern recognition divides price formations into three categories:

◆ Bottom Area (relatively low points)—W Bottom

A W bottom looks like the letter W on a chart. The left side is called “left leg,” the right side “right leg,” and the highest point connecting the two legs is called the “neckline.”

Logic behind W bottom formation:

1. The stock price plunges sharply, with high turnover and exhausted selling pressure, leading to a rebound (left leg)
2. After the rebound, new funds are insufficient, and the price falls back, with decreasing volume, until sensitive traders realize “it can’t go down anymore” and actively buy in (right leg)
3. More and more funds notice the stock, and finally the price breaks through the “neckline,” triggering chasing momentum, with volume surging

Once the price breaks through the neckline, it is a clear buy signal.

◆ Head Area (relatively high points)—M Top

An M top is the opposite of a W bottom, looking like the letter M on a chart. The left shoulder is called “left shoulder,” the right shoulder “right shoulder,” and the lowest point between the shoulders is the “neckline.”

Logic behind M top formation:

1. The price surges briefly, reaching a high point with significant profit-taking selling pressure, then falls back (left shoulder)
2. The pullback is seen as a buying opportunity; some funds enter but lack chasing power, volume is less than the left shoulder, and the right shoulder forms
3. Buying interest weakens further, funds start to withdraw, and the price finally breaks below the neckline, accelerating downward

A break below the neckline is a clear sell signal; exit promptly.

Moving Average Strategies: From Single Line Operations to Golden Cross

Moving averages are the most favored indicator among traders because they reflect costs and clearly show trends.

Typically, there are 6 preset moving averages:

• Short-term: 5-day, 10-day moving averages
• Mid-term: 20-day, 60-day moving averages
• Long-term: 120-day, 240-day moving averages

When the short-term > mid-term > long-term, it is called a “bullish alignment” (uptrend); the opposite is a “bearish alignment” (downtrend).

Strategy 1: Single Moving Average Trading

The simplest practical approach is focusing on just one moving average, choosing based on your trading cycle.

• Moving average trending upward, price above the moving average → Bullish, consider going long
• Moving average trending downward, price below the moving average → Bearish, consider shorting
• Frequent crossing of the price and the moving average → Market is consolidating; avoid trading

Strategy 2: Golden Cross and Death Cross

This is the most classic use of two moving averages:

• Golden Cross: Short-term moving average crosses above the long-term moving average → Buy signal, short-term acceleration upward
• Death Cross: Short-term moving average crosses below the long-term moving average → Sell signal, short-term weakening

The Truth About Technical Analysis

Technical analysis is not mysticism, but it is also not 100% accurate. The usefulness of candlestick analysis lies in providing a common language for traders to communicate. The effectiveness of W bottoms and M tops is because enough people are trading with the same logic, creating a self-fulfilling prophecy.

Real experts do not rely solely on a single indicator but combine tools like candlesticks, moving averages, and pattern recognition, while strictly adhering to stop-loss discipline. There are no perfect indicators, only perfect execution.