Understanding Candlestick Charts for Trading

[Music] now by the end of this episode you're going to know the name for each one of these individual candles you can find them on pretty much any Candlestick chart like we have on this one right here which we're going to use as an example but let's go ahead and step back for a moment and dissect just an initial candle just to make sure we're all on the same page so I'm going to go ahead and erase this this is from a project that we were working on uh yesterday for students at Warrior trading and we're going to start by drawing a simple candle now candlesticks were created in the 1700s by a Japanese rice Futures Trader and they have been became very popular in Japan and then made their way uh to the West uh many years later this is a typical candle and it communicates four pieces of information the four pieces of information include the open the close the high and the low now all of these candles here on the back also include those four pieces of information but the difference in the shape is based on the differences between between the open the close the high and the low so the shape of course communicates sentiment ultimately a Candlestick is reflecting the price action that occurred during a period of time and it communicates the battle that is going on between the buyers and the sellers as the candle finally closes at the end of that session the end of that trading period we have a shape that communicates who was really in control was it the buyers or was it the sellers so so let's talk about how this works now a Candlestick represents a period of time now in in the older days these candles were primarily daily charts so a daily chart would mean this candle represented all of the price action that occurred within one day of trading activity so the market opened down here this is the open right this is the bottom of the candle and the price uh obviously declined because it hit a low down here so at some point it declined and we don't know exactly how it deined but what we know is of these four pieces of information is enough to create the candle and it gives us enough information about the sentiment the low is created and then at some point it comes all the way up to here to create a high which is H and then it pulls back and closes right here so more or less we know that this is what happened during that day of time now it's possible of course that the price opened and we went all the way to the high came all the way to the low and then came back up to close here so we don't know exactly what happened intraday but regardless of the way this candle was created this is the way it closed so this is the final shape and this becomes the candle on the record for that day of time now I'm an active day trader and so although I use daily charts to help me understand the the big picture context if I like the daily chart then I zoom zoom in to shorter time frames to help me myself find an entry now my average trades are only about 5 minutes long so I actually spend more time studying technical analysis analyzing potential patterns and trying to find entries than I actually spend trading which only reinforces why this is so important for you to learn okay so for me I'm not using daily charts I'm using uh one minute charts one minute charts primarily which means each of these candles is just 1 minute 60 seconds of time all right 60 seconds of time right here and so all of this can happen very fast now on a stock that has just ipoed or on a stock that has breaking news a lot can happen within a minute as you will certainly see as we dive into some of these charts okay so this is the anatomy of how a candle is created this is of course a green candle a red candle still communicates these same four pieces of information except it opens high and it closes at the bottom so the candle then is red in color so the only thing that's switched is the open and the close price because the close was lower than the open and this is why we do need to differentiate green and red candles because the open and the close are flipped between these two candles so for some people that are color blind they'll have uh red candles that are solid filled with color and then they'll have the green candles be Hollow and that's a fine way to do it uh but for anyone else who's has no problem then red and green become the colors that you use and this is uh this is very common so now let's start to talk about what some of these different Candlestick shapes mean all right so I'm going to do this um again on this side I'm going to erase this here and we're going to start over with a clean whiteboard and we're going to draw a candle where the price this is the open so the price opens here and the price is going to decline a fair bit it's going to come all the way back up we move up very quickly to here and then we pull back and we close right about here so we've got the open the close the high and the low so if we plotted this out and this is how you would actually create these charts in the old days before charts were created for you you would be able to draw something that looked kind of like this now this is a standard Candlestick shape and it has a long upper shape Shadow or an upper candle wick right here and it has a lower candle wick right here this is a bullish candle because the low uh is is wait sorry the uh the close and the open are far enough apart that it shows that the buyers pushed the stock up however anytime we have a larger upper candle wick this shows selling pressure sellers pushed the price back down and it wasn't able to close at the very top so a more bullish candle would be one that doesn't have an upper candle wick at all it just simply squeezed all the way up to this high and then closed right there right naturally that would be a much stronger candle even if it still had this lower candle wick because this lower candle wick or this lower Shadow while it shows that the price did decline here it shows that the buyers bought it back up which is bullish so in total this bottom candle wick and lower Shadow is bullish and an upper candle wick or an upper Shadow is beish we would prefer to see of course a stock open squeeze straight up and close but that doesn't happen uh much of the time when we look at these this is an actual Candlestick chart and we zoom in here you'll see that really there there are a small handful of candles that are have that shape this is one of them right here so this candle is solid green opened at the bottom closed at the top and as I look at this chart right now I think that may be the only candle that is like that except for this one right here but it's so small it doesn't communicate nearly as much sentiment as this huge green one creates so it's much more common when we're trading and when we're analyzing charts that we will expect to see upper candle wicks or lower candle wicks so it's important to note that upper candle wicks are bearish and uh because they're pushing the price back down and these lower candle wicks are bullish pushing the price back up so the first candle right here is called a long body candle it has a it has a long body as the name suggests this is true with both red and green candles they're both longbody candles so body refers to the actual body of the candle so if we have a candle here the body is this section right here and these are the candle wicks so if you were actually holding a candle this one would have a candle wick at both ends this is the body of the candle in the middle and it's also sometimes called the real body and these are the upper and the lower candle wicks and some people call them Shadows I don't really prefer to call them Shadows because that's straying away from the concept that the are candles candles don't have shadows but uh candles do have candle wicks so I I I'm from this point on in the episode we'll just refer to these as candle wicks so upper candle wick and lower candle wick and this is the body so a longbody candle has a very long body now if we go back over here we could draw a um oh just for the sake of adding one I could draw a small body candle or a short body candle right here oops this one has to be in red so a short body candle is just a very small candle right here so these are these would be short and these would be long naturally which one do you think communicates more strength weakness or sentiment in general bigger candles communicate that there's a lot more emotion in the market if we look back on this chart there's a lot of emotion in this candle and there's probably a lot of emotion in this candle and as active Traders we want to trade volatility and volatility comes from emotions now we'll talk in a few minutes about how I sort of decide the right type of financial instrument to try to perform technical analysis on but we'll save that for a moment okay so our first two candles are uh small and longbody candles so I'll just abbreviate SML small and longbody candles okay so these both communicate well the longer ones communicate uh much more strong sentiment and the smaller ones uh less so now let's talk about the next Candlestick shape okay so we're going to back this up here and we're going to create a new candle and based on what you have just learned about candle wicks what does this candle communicate is it is it communicating more strength or more weakness well it has that long lower candle wick and we know that that is bullish it's bullish on the one hand it's not as bullish as a longbody candle so we have to accept that however it's more bullish than the inverse which would be like this if you had to choose between these two candles you would always prefer this one because the lower candle wick shows that although the price declined it was pushed back up so again if we kind of do the anatomy of how this candle was created the price opened the price began a decline to hit a low it then came all the way back up to close here so it showed an incredible amount of strength to recover that loss so this was the open the low the high and the close are at the same price anytime the high and the low the high and the closer at the same price on a green candle that's communicating even more strength we closed at the high sellers weren't even able to push it down going into that Final close which on some candles um it just communicates an incredible amount of strength so this is a candle right here that does communicate strength this has a long lower candle wick right here and it has a small upper body now I will tell you that this is called uh in certain instances this candle is called a hammer and the reason it's called a hammer is that when you have the price that's been declining like this a lot of weakness let's say these are all longbody candles these are all we'll just make it kind of small but these are all longbody candles the price has been declining and then down here we suddenly get this shape right there what we know about this candle wick is that that candle wick creates a bullish sentiment the buyers bought it back up and of course we know in this context the first green candle could be significant this almost looks like a hammer or a mallet and it's called a hammer because the thought is that it's hammering out the base so if we sort of Drew the hammer you know someone's swinging it like this someone's swinging it right they're swinging the hammer and this is the base the low of the pullback right here the low of this dip is the new base now this is a candle that indicates bullish sentiment is coming in and what we look for is for the next candle to confirm that by going green and moving higher so in this particular instance this candle right here is giving a big signal it's giving us a Buy Signal and a lot of beginner Traders will miss it completely they'll see the C the candles that are red they'll think it's too weak I'm not going to buy it and then by the time it starts bouncing up here they're thinking oh maybe I should get in like up here up here but the smarter traders who have done their technical analysis and have learned how to read this signal are buying right here here the second this green candle makes a new high we have a multi Candlestick pattern now we're going to talk about a number of multi- Candlestick patterns in a moment as we go through this class but I want to talk about the first one right here uh the first one is uh called candle over candle so it looks like this it's just two candles next to each other however this green candle has broken over the high of the previous red candle and for that reason it's called a candle over candle pattern so right here we have candle over candle now this is a green candle and then this is a green candle that broke over which is just fine it's still candle over candle whether it's red or green so it's first candle making a new high so the candle over candle pattern this is a two candle pattern one candle which is the trigger candle and then the second candle is the one that makes the new highve so in this context right here this is called a hammer now I will tell you that it has another name that's a bit more ominous but the these names do communicate a bit of a story so the hammer is communicating that the base is being hammered out however if we see this candle up here and it's red this is called a hanging man here's the problem with this candle it opened high and it closed lower it is true that we have this bullish candle wick that it dipped down and came back up but it's showing for the first time ever in this context some degree of weakness as we said we would prefer to see longbody candles long body long body long body so we finally see it like this well that starts to be a little bit concerning so that candle right up here and we'll make the body just a little bit bigger this is our hanging man candle hanging man we'll just write it like that um and this can be a hanging man as well hanging man as long as the body is big enough that's still the head so this starts to communicate a bit of um indecision however uh this candle right here is called a gravestone so if we flip this like this that is called a gravestone and that is an even worse candle to see in this context because you've got all these candles coming up and then you have this big bullet uh sorry bearish upper candle wick and this small body right here now when we have a candle that opens and closes at more or less the same price so opens it squeezes up it gets pushed all the way down and then closes here this is called a uh oops a do dogee there we go so a dogee candle is a candle that opens and closes at more or less the same price a gravestone dogee has this tall upper Shadow a dragonfly dogee has a long tail down here like a dragonfly does and a long-legged dogee is just a sort of long range here and this is your standard dogee it's more of a more of a cross just like this all of these candles communicate the same thing in a sense what do they communicate let's just think about this for a second the price opens it goes up it goes down and then it closes the communication that we're getting here is that there's a lot of indecision in the market buyers and sellers are in a battle and right now nobody's winning however let's think about this a little bit deeper so if we have the price that has just made an incredible rally to the upside what do we have we have momentum we have strong sentiment and then all of a sudden at the top of that rally we see indecision what do you think is likely to happen this is often a warning sign for a reversal or a correction now now at the end of the day we don't know from this candle right here where the price is going to come all the way back down like this and this would be called a true reversal or if the price is just going to correct like this but what we do know is that if we're in this position and we bought it sentiment is Shifting and it's a good idea to lock up some profit and either get out of the entire position before we get that candle under candle pullback which which is that two Candlestick pattern going the to the downside uh but either lock up the entire position or scale down to a very small size that you can afford to hold during this type of pullback now when we're looking at a Candlestick chart as you'll see on on this Candlestick chart and as we'll um as we'll look at on a couple others uh that we have right back here we often will see that the price will sort of move in these uh waves so you don't always necessarily need to exit the entire position just because you're on a correction you can still hold a piece of it but it's just a reminder that we're getting a pullback now this right here actually shows a small dragonfly dogee you see how this has the flat body at the top and then the slightly longer tail it's not a very long tail but it is a small dragonfly dogee and you could almost almost call that a gravestone dogee it's not perfect because the body is a little bigger and the tail uh or the upside candle wick is not huge but it's close to that and then this certainly is a long-legged dogee so notice though that you have these topping tails that Mark the high bottoming tails that Mark the low topping tails that Mark the high and whenever I'm going through um these these examples we'll often note these large topping Tails right large topping tail noting reversal bottom bottoming tail here noting a reversal from a pull back to a move back up so once you start to learn to recognize the shape of these candles and ask yourself what is this candle telling me that's the beginning of you starting to pick up on those subtle signals in the market and these are buy and sell signals you may not see them yet but they're there so once you start to train your eye to recognize them you're going to start seeing them on a lot of charts and this is the process of build building that confidence now in order to convert this general knowledge that I'm sharing with you right now into an actual skill that can make you money what do you think you need to do you need to practice a lot all right so let's get back to the Whiteboard though all right so we've now talked about our hanging man candles and we've talked about our uh gravestone dogee uh down here gravestone dogee now I want to talk about golly I'm having a temp dra on that all right that's fine so we got the gravestone dogee um and we have our Hammer candle right here this is a hammer and we've got the green candle there now there was another candle that I haven't shown you yet uh which is very similar to this but it's just a little bit different so the gravestone dogee is typically going to look more or less like this but remember that if it's like this or it's like this you know it you have to kind of keep in mind that there are no two Candlestick charts that are identical and so while we have the textbook definition of a gravestone dogee that opens and closes at the same price right here what happens if it closes two cents lower what if it's 4 cents lower right does it really change the sentiment not significantly and so if you call it a gravestone dogee that's fine if it starts to get a little bigger like this a little bigger like this you know now it's starting to take a little bit of a different shape we call this candle here a shooting star why do you think we call it a shooting star it's because this candle when it occurs at the top of a move like this usually is an indicator the price is going to come back down however what we need in order to confirm that this indicator is in fact correct is that candle under candle pattern so the next candle will open and it needs to break the low of this candle right here it needs to break the close so when that happens the moment that happens we now have a shortterm a correction that is beginning and then if the next candle breaks the low yet again and the next candle yet again yet again yet again then we're on a straight pullback however if in this area let's just say for instance we have this small body candle right here and a little bit like that this starts to look a little bit like a hammer right we're starting to get a little bit of that hammer shape which means this is the base right so we we draw the hammer kind of sideways it's hammering out this base right here so that means this could be our potential new support level these candlesticks and the shapes that occur help us Define areas of support or resistance you're going to have these topping tails up around resistance you're going to have these bottoming Tails down around support areas of support have demand see the bulls the bulls bought the stock back up so this is support slash demand there are buyers down here and up here we have resistance slash Supply so up here we have people that are willing to sell now we came up up here we pulled back this right here what's this pattern called when we have two candles like this this is the candle over candle pattern as this green candle moves back up so a very common trade for me would be to be a buyer right around here not uh right right at this price the moment this green candle crosses the high of this red candle and my Max loss would be down here this would be my Max loss right here now we're going to talk about this pattern a little bit more in a moment we've got our um our Hammer we've got our hangman we have right here our shooting star shooting star and again these can be both red and green some people are a little bit sticklers about this um shooting star I really think that the sentiment is pretty clear and it's only stronger in one way or the other depending on the color so if this is red it's an even stronger confirmation even in this existing candle that the price is already reversing quickly than if it was green so if if this was a green candle it's like okay well you know obviously we we certainly still have the same weakness same sentiment but it did close a little higher so let's see what happens it's possible that you could have this as a momentary kind of battle and then you have a red candle but it doesn't make a new low it just kind of goes right there and then next thing you know you've got another green candle and we're rallying back up and we're pushing against this resistance level and seeing whether or not we can test it so that's not uncommon ultimately I'm not going to want to exit the position if I'm into the long side until we have that candle under candle formation and then I'm not going to want to get back into the buy side until we have that candle over candle formation and so for what it's worth if I was if I would have been entering this um you know let's just say this had squeezed up like this the the place I would have been a buyer would have been uh right in here that's the candle over candle right down there so that would have been our entry this would have been Max loss based on these two candlesticks here it's just a two Candlestick pattern and then profit would have been uh exiting right here first candle to go down now this is starting to get into a little bit of strategy on a multi Candlestick pattern this is the first multi Candlestick pattern but it's worth noting that this multi Candlestick pattern right here is not going to be significant to a candle over candle formation if the price for instance is going sideways so like in this area right here I'm just going to zoom into this area in this area right here seeing candle over candle is not as significant right in here for instance it's meaningless down here we do have a little bit of selloff and then we have a candle over candle and that carries more meaning that's fine but then we go back into an area that's more less sideways but like right in here right in here these don't lead to significantly bigger moves to the upside because here's the thing the stock is already going sideways it's already indecisive so similarly let's write down a couple of rules so rule number one you remember I talked about dois being candles of indecision dois only important and I'll just important when trending so this is like uh stock market hieroglyphs so do are only important when the stock is trending in other words they're not important when the stock is going sideways because what do dois communicate they communicate in decision if the stock is going sideways it's already indecisive so this doesn't tell us anything more than we already know but it's important to know this so dois are only important when they occur specifically near the top of a move or near the bottom of a move these are the areas where they can indicate a possible revers number two hammers shooting stars and hanging men which is also a dogee variation again only important only important during strong consolid strong trending up or down those are the only times that they're important when you see a hammer or a shooting star but the price is going sideways like sort of in this area here it doesn't carry the same weight so when are the times that candlesticks are going to be respected the most it's when they are giving us the clue of a change in Direction so we're using candlesticks to help us predict when the price is going to change from going up to going down even as a trend based Trader and I trade with the trend I'm an easy go-lucky person I just like go with the flow right so I'm trading with the trend the price is moving up I want to be trading it as it moves up too however what I know uh let's see where's where should I draw this what I know we'll just draw it small is that price never goes straight up like that it always goes up in waves and so to help me manage my risk it's better if I can buy on one of these momentary pullbacks so that means the area I'm going to be watching closely are these areas right here because we're getting a reversal at the top and then a little reversal here at this pivot so we sort of pivot at the top for a little correction and then we pivot here for the move back up pivot here pivot here pivot here pivot here now this is the area where I'm really focusing once the price starts to kind of drift sideways once again not interested so we really only try to perform technical analysis on a stock Forex pair cryptocurrency curency whatever you're trading that is trending that is moving that has potentially tens of thousands or millions of other people watching it at the same time that's when the signals are going to be received by the most people and you're therefore going to see the most um the most extreme reaction to these signals and an extreme reaction to a reversal signal is going to be a big move so uh one other candle so again this can be a hammer but it's only a hammer when it occurs at the bottom of a move it's a more of a hanging man when it occurs at the top uh this is called a spinning top spinning top right here same here spinning top so a spinning top um just like a top it's just again it communicates indecision similar to a dogee it does have a small real body here but it's just not very big and this is more or less a longbody candle but just has um a little extra candle wick on the top and the bottom so more or less a strong sentiment candle but just with a little bit of that extreme um this we already talked about in the context of a move up it's a shooting star or potentially a gravestone dogee depending on U depending on how big the body is okay and then uh the dragonfly dogee and the standard dogee and the long-legged dogee we already talked about so separate sort of breakaway reminder on the dois we've got the long-legged dogee the standard dogee the gravestone Stone uh dogee and the hammer sorry the the gravestone dogee and the dragonfly dogee right there those are four standard dois okay so now let's jump back in here and start to put the pieces together on how these candlesticks communicate more sentiment and and and and really give us a specific entry or an exit so right here you can see very clearly we've got something that's moving it's trending up now what I can tell you about this particular um security is that typically what what I'm looking for is a catalyst so if we jump back onto the Whiteboard here part of my job with technical analysis and especially as an educator is to teach you that it's a myth to think you need to have picture perfect candlesticks because real life isn't Picture Perfect it's not like textbooks same with nature it's messy it's sloppy it's just it's never quite the same so you have to be able to use your own critical thinking to look at a pattern and understand in totality the message that it's sending is it bullish is it bearish are we having a battle here is this the spot where we're going to see a swing in price and so rather than trying to find Picture Perfect patterns I want you to focus in instead on making sure you're trading the most obvious Financial instrument because you know if you if you see a pattern and you think it's really picture perfect but nobody else in the entire world sees it who's going to be buying that breakout nobody because nobody saw it right if a tree falls in the forest and you know no one's there to hear it fall does it make a noise nobody will ever know and that's kind of the problem with these patterns if there could be a perfect pattern but nobody sees it so that's why stocks like Tesla or the S&P 500 are so popular because if there's a pattern no one will miss it now one of the challenges with trading those types of stocks is that you're also competing against some of the biggest and best hedge funds and highfrequency trading algorithms in the world these guys are so good and they've Mak they made so much money they hire phds in math to create these incredibly complex algorithms to predict the market but they only do that on markets where they can put millions and millions of dollars in and take millions and millions of dollars out so the type of markets that get very thickly traded with these incredibly Elite Traders are markets on large cap stocks Nvidia Tesla Apple Google Netflix these household names that you're familiar with S&P 500 this is also true with commod of these contracts it's true with with currency payers because they're just so popular so my Edge has always come from Trading stocks that have breaking news a stock that has breaking news will bring a lot of retail Traders off the sidelines in to trade it because you see that there's a news Catalyst that's moving at higher so on the individual days when a large cap stock has news okay I'll I'll cons I'd consider it but more or less on any given day what I'm trading is usually a lower price stock that has some type of breaking news that's a big deal for that company and so if we look at this here this is an example of a stock that went from about $2.30 a share to $4.40 a share so went up nearly 100% And it did it and this is a f minute chart here so it did it over the course of like an hour and it did it naturally on breaking news so this is the type of thing that is going to create a lot of emotion and there's millions of shares of volume so people are buying it and selling it and Rapid trading and the pullbacks are respected the patterns are acknowledged so many Traders are seeing it this is where we start to get really clean and clear price action okay so let's jump onto the Whiteboard and kind of talk about uh one of one of my favorite patterns so one of my favorite patterns here um begins typically with a news catalyst so we're going to have breaking news right down here and let's just say it's at 8:00 a.m. all right Eastern Standard Time not that that really matters but I'm just going to throw it out there now for those that are curious you can trade the Market opens the US Stock Market opens at 4:00 a.m. for pre-market trading that goes till 9:30 a.m. and then um from 9:30 a.m. until 400 p.m. is regular session and then 400 p.m. to uh 8800 p.m. is after hours so most Brokers will allow you to trade both pre and after uh pre-market and after hours in addition to regular hours right here and so you may have to change your order settings to enable uh premarket or after hours trading but most most uh Brokers will allow it the only thing to note is that there are no stop orders pre-market or after hours so that means when you're trading you have to have uh ideally a button that you've scripted to your keyboard that will allow you to press it and exit with a limit order so this is difference between limit orders and Market orders not to get into weeds here but just I wanted to mention it okay so nonetheless um I actually do a lot of my trading at beginning starting at about 7:00 a.m. and I'm usually done most days by 10: to 11:00 a.m. unless the Market's really strong um and that just works really well for my schedule and for what it's worth if you're trading in Europe you know you're sitting down here at 100 p.m. uh in in Europe and you could trade until you know 5 5 6 p.m. if you're trading in Japan you're sitting down at 8:00 p.m. 7: am. so 13 hours ahead you're trading at 8:00 pm and you're finishing at you know 10 p.m. 11: p.m. so you've got Traders all across Europe and Asia that trade the US market Hawaii is a tough time zone I think they're at um like 1 it' be like 1:00 a.m. but we do have students at Warrior trading that are in Hawaii and trade the US market but the reason the US market is so popular even among International traders who could choose to trade their local exchange is because of the combination of volatility and liquidity because if you're going to day trade you need to be in markets where you can move in and out with you know big enough size to make your daily goal whatever that might be my daily goal is $5,000 but I should say as always my results are not typical and there's no guarantee that you'll find a similar result that's my disclaimer that I always remind people of okay so news is at uh 8 a. here on this particular example and immediately instantaneously the news comes out and the price squeezes up this happens it's it just happens like in an instant so the price squeezes up right here and what we typically have is news comes out instant longbody candle longbody candle one longbody candle two now the problem with longbody candles is that you know you can't really easily Buy in the middle of one because it's going to be extended relative to where it was before this Catalyst came out before the news began so typically what I do is I wait for that correction now what are some of the Poss possible correction candles that could occur right here okay so I'll just give you some options of Correction candles possible possible candles that indicated correction we could have dois we could have a standard dogee we could have a long-legged dogee we could have the gravestone dogee or we could have the dragonfly dogee those are four different does that could right here if they were in this position right here could indicate a possible reversal so I'll just we're kind of filling in the blank of what's going to happen inside this candle um or so that's that's option number one a dogee option number two we could have a um a shooting star right here and it could be either uh red or green okay so a shooting star we could have a hanging man so we'll do the hanging man here like this and all of these are indicating um these of course are indicating a decision these are indicating a very high likelihood of a reversal because we already have this bearish topping tail this is a little bit more we've got to wait to see because we have the the bullish bottoming tail but the the body closed here so this is the low of the body so if we had this Candlestick shape right here let's choose number three number three well you know what I'll go through what I would do in each case but number three is the most most complicated if we have a dogee right here I would wait to take my entry until we break the low of the dogee right there so if I was going to go short I would be shorting as soon as that level breaks or if I was holding to the long side I would sell as soon as that level breaks right there and I would get out okay so that's the spot right there where I'd be exiting if this is a dogee if this is a shooting star same thing shooting star I would getting out or uh taking a short position the second this next candle breaks the low of candle number one so this a two Candlestick pattern that's one this is two the second this candle makes the new low candle under candle I'm out of the trade now if we had a hanging man candle this one's a little bit trickier because usually here's the problem we want to be going uh getting out or going short for candle under candle but it closed way up here which means if this candle goes red we wouldn't be shorting until way down here that's already forming kind of a longbody candle and that may be basically the full extent of the correction so in this particular case I would consider a break of the low of the candle's body right here to be my indicator to get out so right here the second it breaks the low that could be an indicator to get out now this is a little bit tricky because it's not officially candle under candle until you're way down here but if this is a long candle wick I may not want to hold that far down so that's going to be the most complicated um of the three potential choices that you have for for reversal candles okay so let's say that we got a dogee here and then the next candle was a small body red candle and I'm just going to switch to this pen here for a moment so small body red candle okay so we did a candle under candle so I'm out of my position or in this case because news just came out I never even took a position yet I'm just watching we get another small body candle so this is candle in this pattern candle number three now I suppose in truth this is at this point a five candle pattern because it's not a pattern without these big green candles these create the context but we don't need to count the candles in the pattern because it doesn't matter how many are in it so what we know here is that we have these three candles that went up that squeezed higher let's go ahead on this side and draw this a little bit larger so you can see it more clearly okay so we had the breaking news we had candle number one we had candle number two again don't don't need to count it don't know why I'm counting it again and then we have this candle here that pull pulled back and another candle here that pulled back so now at this point we've seen the move up we've seen the dogee that indicated a reversal we've got a pullback for the first candle a pullback for the second candle now I'm starting to think about first candle to make a new high and a move back up my first profit Target will be a move back to the high of day which is up here right up in this area but I'd like to see a move even higher so where do I buy I don't really want to buy just right here because the price might just keep trending lower now if this candle had a bottoming tail here what does a bottoming tail communicate buyers so this is something that would be desirable if we saw this bottoming tail that would be desirable but regardless of whether or not we see the bottoming tail I'm going to wait for the first candle that makes a new high so making a new high is when the price of this candle breaks the high over the previous candle so we go from making a new low a new low a new low relative to the previous to now making a new high now there are times where we will have a candle um at the bottom like this where it opens it dips down and it closes here and it's green but I don't usually buy this candle because we haven't yet made a new high so I'm still a buyer on this candle right here but I may be buying almost the moment this candle opens because remember if we close here presumably we're going to open it more or less the same price and now we're going to be opening into that first candle moving up so this is a time where I'm going to be pretty quick to jump in and it is bullish because we have that bottoming tail right there and then we're starting to Surge back up and this is the setup that I trade this is now a multi Candlestick pattern and this Candlestick pattern has two longbody candles one standard dogee one small body red candle one possible Hammer candle hammering out a base giving us a little bit of a reversal this in this context would not be a hanging man because a hanging man only occurs at the top of an uptrend a shooting star only occurs at the top of an uptrend a hammer occurs at the bottom of a pullback so this is a hammer even though it's the same Candlestick shape the context is what gives it the name CU at the bottom it's bullish whereas at the top it's starting to be a little not so great all right so then I'm I'm entering down here this is a place where I'd be a buyer right here I would buy this would be my Max loss and let's say this is a ratio of $100 approximately dollar amount so then I want to be able to make approximately 200 so this is 100 plus 200 plus right so that's what we would be looking for a 2:1 profit to loss ratio and getting out up around this area now if you can do this and trade with a 2: one profit to loss ratio you only need to be right 33% of the time in order to break even that's just a statistical fact so if you write 50% of time 60% of time 70% of time well then you can be doing really well so for those that are curious my trading has been between 65 and 70% over the last8 years which has been good and I produced over $10 million of net profit after fees and commissions I'll say again my results are not typical but they are verified they are audited you can see that on my website if you're curious and it is trading more or less the variation of this strategy and several others exclusively using Candlestick charts to help me understand my best entries and exits so this is a standard multi Candlestick pattern that we would typically call the bull flag so bull flag bull flag a few candles going up a couple candles pulling back and then first candle makes a new high now in addition to the bull flag we have an ABCD pattern so I'm going to teach you the ABCD pattern here ABCD now the ABCD pattern is a little bit different um it's similar but what happens on the ABCD pattern and we can do this one as a um oops we'll do this one here as a little gravestone dogee and then we're going to pull back and then we'll just say um we do a little bottoming tail there and then we move back up right here but in this case you see how we have this dogee up here so these topping Tails they're really tough because it shows that the price could not hold that level so in this case we come back up to this level but we don't go through new highs we sell off again we dip back down and this is now creating an ABCD pattern a b c and what do you think is d d is the next leg up right here so what we look for on an ABCD pattern is the price to come back up and on the second attempt it goes through the high so well wait a second but this is just a bull flag you're right this is a bull flag and I would still take this trade but it doesn't go all the way to the first profit Target and so as soon as we have a red candle that makes a new low candle under candle I get out this is still going to be a winning trade in this particular instance because I'm in right here and I'm out right here it's just a small winner it pulls back again and then what I know is that the more times this resistance level is tested the more likely it is to break so I can do one of two things for an ABCD pattern I can get back in right here at Point C which is basically a bull flag pattern but the second attempt I will do that as long as there's enough room to get profit out if it comes back to high a day this is the high right in my hand at resistance so as long as I can make a little bit of money from right here to right here I'll take the entry here if it's too close together the word I won't be able to make money if it just runs into resistance I'll wait until it looks like this level's going to break and then I'll get in right here for the breakout and my stop is at the low of the pullback although that's a larger stop what we know about this pattern is that this longer period of consolidation serves as coiling and building strength for that final break through that level and so we often see a really big breakout off of the ABCD pattern so I always teach people the bull flag first because uh an ABCD pattern includes a bull flag that ultimately did not resolve all the way to the upside and then it turns into that ABCD pattern now there are also times where we end up with what we call a um ma uh pullback I'm just going to abbreviate it here a moving average pullback and in a moving average pullback we have this sort of similar one two big green candles whatever dogee at the top it dips down a little bit first candle make a new high squeezes back up isn't able to break through pulls back again comes back up one more time can't break through pulls back again you know kind of Dipping down and basically at this point I'm going to stop trading the first candles to make a new high because we're just sort of pulling back at this point typically we're looking for support around a moving average like the 9 EMA the nine exponential period moving average this is going to be on a a 1 minute or a 5 minute chart and then once it's tapped this level this level creates support and then that's when we're more likely to finally break away but initially at the very beginning of the move it may be a bull flag it may be an ABCD pattern and both of those fail but I'm still going to keep watching it this is not a picture perfect pattern when it goes sideways for this long but the question is is the stock that I'm trading and in my case I'm trading stocks but in your case you may be trading something else and that's okay am I trading the right thing am I trading something it's obvious that everyone else is watching because if you are you're going to see better resolution than if you're trading something that nobody is looking at things that nobody look at the only people buying and selling maybe is a couple of mutual funds adjust a position add a little sell a little but you don't have retail traders that are buying into it so when we think back about stocks like um GameStop right when we had this incredible move on GameStop that was driven by so many retail Traders watching technical analysis of course understanding the power of short interest and buying the pullbacks it didn't go straight up even in the areas where it made big moves it pulled back and went higher pulled back and moved higher and those are the areas where I was training it I was buying those dips and then looking for that squeeze to the new level and then once we get that candle under candle I was getting out letting it pull back not knowing if it was going to come all the way back down or just pull back a little bit and then get back in for that next leg up now if you want to continue learning about technical analysis and how to read Candlestick charts I'm going to put a link in the description where you can download my 112 page PDF this is a resource you can download you can print it out and I encourage you to put those uh printouts around your your trading station and some of them are going to look kind of like this because you want to have these all around because your job as a Trader is to begin to visualize the pattern completed when we're trading in real time we only see the beginning part of the pattern we see the two longbody candles the one dogee the one red candle the second red candle and now we have to visualize what's going to happen next we use technical analysis to help us get a inclination of what we think is going to happen next But ultimately it's about pattern recognition and that pattern recognition the more times you see it the more you recognize it well it's going to build confidence so I encourage you to download that PDF I also encourage you to practice trading the strategies that you're learning from me in a safe simulated trading environment because look there's no business putting real money into the market until you first proven you can make money in a simulator and I'll tell you guys the market will be here for you it will wait for you I mean it's not going to wait for you but it'll be here for you and there will be other opportunities so don't feel that you should jump in with real money right now before you're ready you do that and you're going to lose money it took me years to get to the point where I was consistently profitable and it took me many more years before I got to the point where I made my first million dollars trading it takes time but pay your dues study up and hey you know what if you enjoy this episode hit that Thumbs Up And subscribe to the channel for more episodes about trading strategy just like this as I end this episode I'll remind you as always that trading is risky my results are not typical and there's no guarantee you'll find success as a Trader whether you trade with me or you learn on your own so manage your risk take it slow and I'll see you for the next episode real soon

[Music] now by the end of this episode you&#39;re going to know the name for each one of these individual candles you can find them on pretty much any Candlestick chart like we have on this one right here which we&#39;re going to use as an example but let&#39;s go ahead and step back for a moment and dissect just an initial candle just to make sure we&#39;re all on the same page so I&#39;m going to go ahead and erase this this is from a project that we were working on uh yesterday for students at Warrior trading and we&#39;re going to start by drawing a simple candle now candlesticks were created in the 1700s by a Japanese rice Futures Trader and they have been became very popular in Japan and then made their way uh to the West uh many years later this is a typical candle and it communicates four pieces of information the four pieces of information include the open the close the high and the low now all of these candles here on the back also include those four pieces of information but the difference in the shape is based on the differences between between the open the close the high and the low so the shape of course communicates sentiment ultimately a Candlestick is reflecting the price action that occurred during a period of time and it communicates the battle that is going on between the buyers and the sellers as the candle finally closes at the end of that session the end of that trading period we have a shape that communicates who was really in control was it the buyers or was it the sellers so so let&#39;s talk about how this works now a Candlestick represents a period of time now in in the older days these candles were primarily daily charts so a daily chart would mean this candle represented all of the price action that occurred within one day of trading activity so the market opened down here this is the open right this is the bottom of the candle and the price uh obviously declined because it hit a low down here so at some point it declined and we don&#39;t know exactly how it deined but what we know is of these four pieces of information is enough to create the candle and it gives us enough information about the sentiment the low is created and then at some point it comes all the way up to here to create a high which is H and then it pulls back and closes right here so more or less we know that this is what happened during that day of time now it&#39;s possible of course that the price opened and we went all the way to the high came all the way to the low and then came back up to close here so we don&#39;t know exactly what happened intraday but regardless of the way this candle was created this is the way it closed so this is the final shape and this becomes the candle on the record for that day of time now I&#39;m an active day trader and so although I use daily charts to help me understand the the big picture context if I like the daily chart then I zoom zoom in to shorter time frames to help me myself find an entry now my average trades are only about 5 minutes long so I actually spend more time studying technical analysis analyzing potential patterns and trying to find entries than I actually spend trading which only reinforces why this is so important for you to learn okay so for me I&#39;m not using daily charts I&#39;m using uh one minute charts one minute charts primarily which means each of these candles is just 1 minute 60 seconds of time all right 60 seconds of time right here and so all of this can happen very fast now on a stock that has just ipoed or on a stock that has breaking news a lot can happen within a minute as you will certainly see as we dive into some of these charts okay so this is the anatomy of how a candle is created this is of course a green candle a red candle still communicates these same four pieces of information except it opens high and it closes at the bottom so the candle then is red in color so the only thing that&#39;s switched is the open and the close price because the close was lower than the open and this is why we do need to differentiate green and red candles because the open and the close are flipped between these two candles so for some people that are color blind they&#39;ll have uh red candles that are solid filled with color and then they&#39;ll have the green candles be Hollow and that&#39;s a fine way to do it uh but for anyone else who&#39;s has no problem then red and green become the colors that you use and this is uh this is very common so now let&#39;s start to talk about what some of these different Candlestick shapes mean all right so I&#39;m going to do this um again on this side I&#39;m going to erase this here and we&#39;re going to start over with a clean whiteboard and we&#39;re going to draw a candle where the price this is the open so the price opens here and the price is going to decline a fair bit it&#39;s going to come all the way back up we move up very quickly to here and then we pull back and we close right about here so we&#39;ve got the open the close the high and the low so if we plotted this out and this is how you would actually create these charts in the old days before charts were created for you you would be able to draw something that looked kind of like this now this is a standard Candlestick shape and it has a long upper shape Shadow or an upper candle wick right here and it has a lower candle wick right here this is a bullish candle because the low uh is is wait sorry the uh the close and the open are far enough apart that it shows that the buyers pushed the stock up however anytime we have a larger upper candle wick this shows selling pressure sellers pushed the price back down and it wasn&#39;t able to close at the very top so a more bullish candle would be one that doesn&#39;t have an upper candle wick at all it just simply squeezed all the way up to this high and then closed right there right naturally that would be a much stronger candle even if it still had this lower candle wick because this lower candle wick or this lower Shadow while it shows that the price did decline here it shows that the buyers bought it back up which is bullish so in total this bottom candle wick and lower Shadow is bullish and an upper candle wick or an upper Shadow is beish we would prefer to see of course a stock open squeeze straight up and close but that doesn&#39;t happen uh much of the time when we look at these this is an actual Candlestick chart and we zoom in here you&#39;ll see that really there there are a small handful of candles that are have that shape this is one of them right here so this candle is solid green opened at the bottom closed at the top and as I look at this chart right now I think that may be the only candle that is like that except for this one right here but it&#39;s so small it doesn&#39;t communicate nearly as much sentiment as this huge green one creates so it&#39;s much more common when we&#39;re trading and when we&#39;re analyzing charts that we will expect to see upper candle wicks or lower candle wicks so it&#39;s important to note that upper candle wicks are bearish and uh because they&#39;re pushing the price back down and these lower candle wicks are bullish pushing the price back up so the first candle right here is called a long body candle it has a it has a long body as the name suggests this is true with both red and green candles they&#39;re both longbody candles so body refers to the actual body of the candle so if we have a candle here the body is this section right here and these are the candle wicks so if you were actually holding a candle this one would have a candle wick at both ends this is the body of the candle in the middle and it&#39;s also sometimes called the real body and these are the upper and the lower candle wicks and some people call them Shadows I don&#39;t really prefer to call them Shadows because that&#39;s straying away from the concept that the are candles candles don&#39;t have shadows but uh candles do have candle wicks so I I I&#39;m from this point on in the episode we&#39;ll just refer to these as candle wicks so upper candle wick and lower candle wick and this is the body so a longbody candle has a very long body now if we go back over here we could draw a um oh just for the sake of adding one I could draw a small body candle or a short body candle right here oops this one has to be in red so a short body candle is just a very small candle right here so these are these would be short and these would be long naturally which one do you think communicates more strength weakness or sentiment in general bigger candles communicate that there&#39;s a lot more emotion in the market if we look back on this chart there&#39;s a lot of emotion in this candle and there&#39;s probably a lot of emotion in this candle and as active Traders we want to trade volatility and volatility comes from emotions now we&#39;ll talk in a few minutes about how I sort of decide the right type of financial instrument to try to perform technical analysis on but we&#39;ll save that for a moment okay so our first two candles are uh small and longbody candles so I&#39;ll just abbreviate SML small and longbody candles okay so these both communicate well the longer ones communicate uh much more strong sentiment and the smaller ones uh less so now let&#39;s talk about the next Candlestick shape okay so we&#39;re going to back this up here and we&#39;re going to create a new candle and based on what you have just learned about candle wicks what does this candle communicate is it is it communicating more strength or more weakness well it has that long lower candle wick and we know that that is bullish it&#39;s bullish on the one hand it&#39;s not as bullish as a longbody candle so we have to accept that however it&#39;s more bullish than the inverse which would be like this if you had to choose between these two candles you would always prefer this one because the lower candle wick shows that although the price declined it was pushed back up so again if we kind of do the anatomy of how this candle was created the price opened the price began a decline to hit a low it then came all the way back up to close here so it showed an incredible amount of strength to recover that loss so this was the open the low the high and the close are at the same price anytime the high and the low the high and the closer at the same price on a green candle that&#39;s communicating even more strength we closed at the high sellers weren&#39;t even able to push it down going into that Final close which on some candles um it just communicates an incredible amount of strength so this is a candle right here that does communicate strength this has a long lower candle wick right here and it has a small upper body now I will tell you that this is called uh in certain instances this candle is called a hammer and the reason it&#39;s called a hammer is that when you have the price that&#39;s been declining like this a lot of weakness let&#39;s say these are all longbody candles these are all we&#39;ll just make it kind of small but these are all longbody candles the price has been declining and then down here we suddenly get this shape right there what we know about this candle wick is that that candle wick creates a bullish sentiment the buyers bought it back up and of course we know in this context the first green candle could be significant this almost looks like a hammer or a mallet and it&#39;s called a hammer because the thought is that it&#39;s hammering out the base so if we sort of Drew the hammer you know someone&#39;s swinging it like this someone&#39;s swinging it right they&#39;re swinging the hammer and this is the base the low of the pullback right here the low of this dip is the new base now this is a candle that indicates bullish sentiment is coming in and what we look for is for the next candle to confirm that by going green and moving higher so in this particular instance this candle right here is giving a big signal it&#39;s giving us a Buy Signal and a lot of beginner Traders will miss it completely they&#39;ll see the C the candles that are red they&#39;ll think it&#39;s too weak I&#39;m not going to buy it and then by the time it starts bouncing up here they&#39;re thinking oh maybe I should get in like up here up here but the smarter traders who have done their technical analysis and have learned how to read this signal are buying right here here the second this green candle makes a new high we have a multi Candlestick pattern now we&#39;re going to talk about a number of multi- Candlestick patterns in a moment as we go through this class but I want to talk about the first one right here uh the first one is uh called candle over candle so it looks like this it&#39;s just two candles next to each other however this green candle has broken over the high of the previous red candle and for that reason it&#39;s called a candle over candle pattern so right here we have candle over candle now this is a green candle and then this is a green candle that broke over which is just fine it&#39;s still candle over candle whether it&#39;s red or green so it&#39;s first candle making a new high so the candle over candle pattern this is a two candle pattern one candle which is the trigger candle and then the second candle is the one that makes the new highve so in this context right here this is called a hammer now I will tell you that it has another name that&#39;s a bit more ominous but the these names do communicate a bit of a story so the hammer is communicating that the base is being hammered out however if we see this candle up here and it&#39;s red this is called a hanging man here&#39;s the problem with this candle it opened high and it closed lower it is true that we have this bullish candle wick that it dipped down and came back up but it&#39;s showing for the first time ever in this context some degree of weakness as we said we would prefer to see longbody candles long body long body long body so we finally see it like this well that starts to be a little bit concerning so that candle right up here and we&#39;ll make the body just a little bit bigger this is our hanging man candle hanging man we&#39;ll just write it like that um and this can be a hanging man as well hanging man as long as the body is big enough that&#39;s still the head so this starts to communicate a bit of um indecision however uh this candle right here is called a gravestone so if we flip this like this that is called a gravestone and that is an even worse candle to see in this context because you&#39;ve got all these candles coming up and then you have this big bullet uh sorry bearish upper candle wick and this small body right here now when we have a candle that opens and closes at more or less the same price so opens it squeezes up it gets pushed all the way down and then closes here this is called a uh oops a do dogee there we go so a dogee candle is a candle that opens and closes at more or less the same price a gravestone dogee has this tall upper Shadow a dragonfly dogee has a long tail down here like a dragonfly does and a long-legged dogee is just a sort of long range here and this is your standard dogee it&#39;s more of a more of a cross just like this all of these candles communicate the same thing in a sense what do they communicate let&#39;s just think about this for a second the price opens it goes up it goes down and then it closes the communication that we&#39;re getting here is that there&#39;s a lot of indecision in the market buyers and sellers are in a battle and right now nobody&#39;s winning however let&#39;s think about this a little bit deeper so if we have the price that has just made an incredible rally to the upside what do we have we have momentum we have strong sentiment and then all of a sudden at the top of that rally we see indecision what do you think is likely to happen this is often a warning sign for a reversal or a correction now now at the end of the day we don&#39;t know from this candle right here where the price is going to come all the way back down like this and this would be called a true reversal or if the price is just going to correct like this but what we do know is that if we&#39;re in this position and we bought it sentiment is Shifting and it&#39;s a good idea to lock up some profit and either get out of the entire position before we get that candle under candle pullback which which is that two Candlestick pattern going the to the downside uh but either lock up the entire position or scale down to a very small size that you can afford to hold during this type of pullback now when we&#39;re looking at a Candlestick chart as you&#39;ll see on on this Candlestick chart and as we&#39;ll um as we&#39;ll look at on a couple others uh that we have right back here we often will see that the price will sort of move in these uh waves so you don&#39;t always necessarily need to exit the entire position just because you&#39;re on a correction you can still hold a piece of it but it&#39;s just a reminder that we&#39;re getting a pullback now this right here actually shows a small dragonfly dogee you see how this has the flat body at the top and then the slightly longer tail it&#39;s not a very long tail but it is a small dragonfly dogee and you could almost almost call that a gravestone dogee it&#39;s not perfect because the body is a little bigger and the tail uh or the upside candle wick is not huge but it&#39;s close to that and then this certainly is a long-legged dogee so notice though that you have these topping tails that Mark the high bottoming tails that Mark the low topping tails that Mark the high and whenever I&#39;m going through um these these examples we&#39;ll often note these large topping Tails right large topping tail noting reversal bottom bottoming tail here noting a reversal from a pull back to a move back up so once you start to learn to recognize the shape of these candles and ask yourself what is this candle telling me that&#39;s the beginning of you starting to pick up on those subtle signals in the market and these are buy and sell signals you may not see them yet but they&#39;re there so once you start to train your eye to recognize them you&#39;re going to start seeing them on a lot of charts and this is the process of build building that confidence now in order to convert this general knowledge that I&#39;m sharing with you right now into an actual skill that can make you money what do you think you need to do you need to practice a lot all right so let&#39;s get back to the Whiteboard though all right so we&#39;ve now talked about our hanging man candles and we&#39;ve talked about our uh gravestone dogee uh down here gravestone dogee now I want to talk about golly I&#39;m having a temp dra on that all right that&#39;s fine so we got the gravestone dogee um and we have our Hammer candle right here this is a hammer and we&#39;ve got the green candle there now there was another candle that I haven&#39;t shown you yet uh which is very similar to this but it&#39;s just a little bit different so the gravestone dogee is typically going to look more or less like this but remember that if it&#39;s like this or it&#39;s like this you know it you have to kind of keep in mind that there are no two Candlestick charts that are identical and so while we have the textbook definition of a gravestone dogee that opens and closes at the same price right here what happens if it closes two cents lower what if it&#39;s 4 cents lower right does it really change the sentiment not significantly and so if you call it a gravestone dogee that&#39;s fine if it starts to get a little bigger like this a little bigger like this you know now it&#39;s starting to take a little bit of a different shape we call this candle here a shooting star why do you think we call it a shooting star it&#39;s because this candle when it occurs at the top of a move like this usually is an indicator the price is going to come back down however what we need in order to confirm that this indicator is in fact correct is that candle under candle pattern so the next candle will open and it needs to break the low of this candle right here it needs to break the close so when that happens the moment that happens we now have a shortterm a correction that is beginning and then if the next candle breaks the low yet again and the next candle yet again yet again yet again then we&#39;re on a straight pullback however if in this area let&#39;s just say for instance we have this small body candle right here and a little bit like that this starts to look a little bit like a hammer right we&#39;re starting to get a little bit of that hammer shape which means this is the base right so we we draw the hammer kind of sideways it&#39;s hammering out this base right here so that means this could be our potential new support level these candlesticks and the shapes that occur help us Define areas of support or resistance you&#39;re going to have these topping tails up around resistance you&#39;re going to have these bottoming Tails down around support areas of support have demand see the bulls the bulls bought the stock back up so this is support slash demand there are buyers down here and up here we have resistance slash Supply so up here we have people that are willing to sell now we came up up here we pulled back this right here what&#39;s this pattern called when we have two candles like this this is the candle over candle pattern as this green candle moves back up so a very common trade for me would be to be a buyer right around here not uh right right at this price the moment this green candle crosses the high of this red candle and my Max loss would be down here this would be my Max loss right here now we&#39;re going to talk about this pattern a little bit more in a moment we&#39;ve got our um our Hammer we&#39;ve got our hangman we have right here our shooting star shooting star and again these can be both red and green some people are a little bit sticklers about this um shooting star I really think that the sentiment is pretty clear and it&#39;s only stronger in one way or the other depending on the color so if this is red it&#39;s an even stronger confirmation even in this existing candle that the price is already reversing quickly than if it was green so if if this was a green candle it&#39;s like okay well you know obviously we we certainly still have the same weakness same sentiment but it did close a little higher so let&#39;s see what happens it&#39;s possible that you could have this as a momentary kind of battle and then you have a red candle but it doesn&#39;t make a new low it just kind of goes right there and then next thing you know you&#39;ve got another green candle and we&#39;re rallying back up and we&#39;re pushing against this resistance level and seeing whether or not we can test it so that&#39;s not uncommon ultimately I&#39;m not going to want to exit the position if I&#39;m into the long side until we have that candle under candle formation and then I&#39;m not going to want to get back into the buy side until we have that candle over candle formation and so for what it&#39;s worth if I was if I would have been entering this um you know let&#39;s just say this had squeezed up like this the the place I would have been a buyer would have been uh right in here that&#39;s the candle over candle right down there so that would have been our entry this would have been Max loss based on these two candlesticks here it&#39;s just a two Candlestick pattern and then profit would have been uh exiting right here first candle to go down now this is starting to get into a little bit of strategy on a multi Candlestick pattern this is the first multi Candlestick pattern but it&#39;s worth noting that this multi Candlestick pattern right here is not going to be significant to a candle over candle formation if the price for instance is going sideways so like in this area right here I&#39;m just going to zoom into this area in this area right here seeing candle over candle is not as significant right in here for instance it&#39;s meaningless down here we do have a little bit of selloff and then we have a candle over candle and that carries more meaning that&#39;s fine but then we go back into an area that&#39;s more less sideways but like right in here right in here these don&#39;t lead to significantly bigger moves to the upside because here&#39;s the thing the stock is already going sideways it&#39;s already indecisive so similarly let&#39;s write down a couple of rules so rule number one you remember I talked about dois being candles of indecision dois only important and I&#39;ll just important when trending so this is like uh stock market hieroglyphs so do are only important when the stock is trending in other words they&#39;re not important when the stock is going sideways because what do dois communicate they communicate in decision if the stock is going sideways it&#39;s already indecisive so this doesn&#39;t tell us anything more than we already know but it&#39;s important to know this so dois are only important when they occur specifically near the top of a move or near the bottom of a move these are the areas where they can indicate a possible revers number two hammers shooting stars and hanging men which is also a dogee variation again only important only important during strong consolid strong trending up or down those are the only times that they&#39;re important when you see a hammer or a shooting star but the price is going sideways like sort of in this area here it doesn&#39;t carry the same weight so when are the times that candlesticks are going to be respected the most it&#39;s when they are giving us the clue of a change in Direction so we&#39;re using candlesticks to help us predict when the price is going to change from going up to going down even as a trend based Trader and I trade with the trend I&#39;m an easy go-lucky person I just like go with the flow right so I&#39;m trading with the trend the price is moving up I want to be trading it as it moves up too however what I know uh let&#39;s see where&#39;s where should I draw this what I know we&#39;ll just draw it small is that price never goes straight up like that it always goes up in waves and so to help me manage my risk it&#39;s better if I can buy on one of these momentary pullbacks so that means the area I&#39;m going to be watching closely are these areas right here because we&#39;re getting a reversal at the top and then a little reversal here at this pivot so we sort of pivot at the top for a little correction and then we pivot here for the move back up pivot here pivot here pivot here pivot here now this is the area where I&#39;m really focusing once the price starts to kind of drift sideways once again not interested so we really only try to perform technical analysis on a stock Forex pair cryptocurrency curency whatever you&#39;re trading that is trending that is moving that has potentially tens of thousands or millions of other people watching it at the same time that&#39;s when the signals are going to be received by the most people and you&#39;re therefore going to see the most um the most extreme reaction to these signals and an extreme reaction to a reversal signal is going to be a big move so uh one other candle so again this can be a hammer but it&#39;s only a hammer when it occurs at the bottom of a move it&#39;s a more of a hanging man when it occurs at the top uh this is called a spinning top spinning top right here same here spinning top so a spinning top um just like a top it&#39;s just again it communicates indecision similar to a dogee it does have a small real body here but it&#39;s just not very big and this is more or less a longbody candle but just has um a little extra candle wick on the top and the bottom so more or less a strong sentiment candle but just with a little bit of that extreme um this we already talked about in the context of a move up it&#39;s a shooting star or potentially a gravestone dogee depending on U depending on how big the body is okay and then uh the dragonfly dogee and the standard dogee and the long-legged dogee we already talked about so separate sort of breakaway reminder on the dois we&#39;ve got the long-legged dogee the standard dogee the gravestone Stone uh dogee and the hammer sorry the the gravestone dogee and the dragonfly dogee right there those are four standard dois okay so now let&#39;s jump back in here and start to put the pieces together on how these candlesticks communicate more sentiment and and and and really give us a specific entry or an exit so right here you can see very clearly we&#39;ve got something that&#39;s moving it&#39;s trending up now what I can tell you about this particular um security is that typically what what I&#39;m looking for is a catalyst so if we jump back onto the Whiteboard here part of my job with technical analysis and especially as an educator is to teach you that it&#39;s a myth to think you need to have picture perfect candlesticks because real life isn&#39;t Picture Perfect it&#39;s not like textbooks same with nature it&#39;s messy it&#39;s sloppy it&#39;s just it&#39;s never quite the same so you have to be able to use your own critical thinking to look at a pattern and understand in totality the message that it&#39;s sending is it bullish is it bearish are we having a battle here is this the spot where we&#39;re going to see a swing in price and so rather than trying to find Picture Perfect patterns I want you to focus in instead on making sure you&#39;re trading the most obvious Financial instrument because you know if you if you see a pattern and you think it&#39;s really picture perfect but nobody else in the entire world sees it who&#39;s going to be buying that breakout nobody because nobody saw it right if a tree falls in the forest and you know no one&#39;s there to hear it fall does it make a noise nobody will ever know and that&#39;s kind of the problem with these patterns if there could be a perfect pattern but nobody sees it so that&#39;s why stocks like Tesla or the S&amp;P 500 are so popular because if there&#39;s a pattern no one will miss it now one of the challenges with trading those types of stocks is that you&#39;re also competing against some of the biggest and best hedge funds and highfrequency trading algorithms in the world these guys are so good and they&#39;ve Mak they made so much money they hire phds in math to create these incredibly complex algorithms to predict the market but they only do that on markets where they can put millions and millions of dollars in and take millions and millions of dollars out so the type of markets that get very thickly traded with these incredibly Elite Traders are markets on large cap stocks Nvidia Tesla Apple Google Netflix these household names that you&#39;re familiar with S&amp;P 500 this is also true with commod of these contracts it&#39;s true with with currency payers because they&#39;re just so popular so my Edge has always come from Trading stocks that have breaking news a stock that has breaking news will bring a lot of retail Traders off the sidelines in to trade it because you see that there&#39;s a news Catalyst that&#39;s moving at higher so on the individual days when a large cap stock has news okay I&#39;ll I&#39;ll cons I&#39;d consider it but more or less on any given day what I&#39;m trading is usually a lower price stock that has some type of breaking news that&#39;s a big deal for that company and so if we look at this here this is an example of a stock that went from about $2.30 a share to $4.40 a share so went up nearly 100% And it did it and this is a f minute chart here so it did it over the course of like an hour and it did it naturally on breaking news so this is the type of thing that is going to create a lot of emotion and there&#39;s millions of shares of volume so people are buying it and selling it and Rapid trading and the pullbacks are respected the patterns are acknowledged so many Traders are seeing it this is where we start to get really clean and clear price action okay so let&#39;s jump onto the Whiteboard and kind of talk about uh one of one of my favorite patterns so one of my favorite patterns here um begins typically with a news catalyst so we&#39;re going to have breaking news right down here and let&#39;s just say it&#39;s at 8:00 a.m. all right Eastern Standard Time not that that really matters but I&#39;m just going to throw it out there now for those that are curious you can trade the Market opens the US Stock Market opens at 4:00 a.m. for pre-market trading that goes till 9:30 a.m. and then um from 9:30 a.m. until 400 p.m. is regular session and then 400 p.m. to uh 8800 p.m. is after hours so most Brokers will allow you to trade both pre and after uh pre-market and after hours in addition to regular hours right here and so you may have to change your order settings to enable uh premarket or after hours trading but most most uh Brokers will allow it the only thing to note is that there are no stop orders pre-market or after hours so that means when you&#39;re trading you have to have uh ideally a button that you&#39;ve scripted to your keyboard that will allow you to press it and exit with a limit order so this is difference between limit orders and Market orders not to get into weeds here but just I wanted to mention it okay so nonetheless um I actually do a lot of my trading at beginning starting at about 7:00 a.m. and I&#39;m usually done most days by 10: to 11:00 a.m. unless the Market&#39;s really strong um and that just works really well for my schedule and for what it&#39;s worth if you&#39;re trading in Europe you know you&#39;re sitting down here at 100 p.m. uh in in Europe and you could trade until you know 5 5 6 p.m. if you&#39;re trading in Japan you&#39;re sitting down at 8:00 p.m. 7: am. so 13 hours ahead you&#39;re trading at 8:00 pm and you&#39;re finishing at you know 10 p.m. 11: p.m. so you&#39;ve got Traders all across Europe and Asia that trade the US market Hawaii is a tough time zone I think they&#39;re at um like 1 it&#39; be like 1:00 a.m. but we do have students at Warrior trading that are in Hawaii and trade the US market but the reason the US market is so popular even among International traders who could choose to trade their local exchange is because of the combination of volatility and liquidity because if you&#39;re going to day trade you need to be in markets where you can move in and out with you know big enough size to make your daily goal whatever that might be my daily goal is $5,000 but I should say as always my results are not typical and there&#39;s no guarantee that you&#39;ll find a similar result that&#39;s my disclaimer that I always remind people of okay so news is at uh 8 a. here on this particular example and immediately instantaneously the news comes out and the price squeezes up this happens it&#39;s it just happens like in an instant so the price squeezes up right here and what we typically have is news comes out instant longbody candle longbody candle one longbody candle two now the problem with longbody candles is that you know you can&#39;t really easily Buy in the middle of one because it&#39;s going to be extended relative to where it was before this Catalyst came out before the news began so typically what I do is I wait for that correction now what are some of the Poss possible correction candles that could occur right here okay so I&#39;ll just give you some options of Correction candles possible possible candles that indicated correction we could have dois we could have a standard dogee we could have a long-legged dogee we could have the gravestone dogee or we could have the dragonfly dogee those are four different does that could right here if they were in this position right here could indicate a possible reversal so I&#39;ll just we&#39;re kind of filling in the blank of what&#39;s going to happen inside this candle um or so that&#39;s that&#39;s option number one a dogee option number two we could have a um a shooting star right here and it could be either uh red or green okay so a shooting star we could have a hanging man so we&#39;ll do the hanging man here like this and all of these are indicating um these of course are indicating a decision these are indicating a very high likelihood of a reversal because we already have this bearish topping tail this is a little bit more we&#39;ve got to wait to see because we have the the bullish bottoming tail but the the body closed here so this is the low of the body so if we had this Candlestick shape right here let&#39;s choose number three number three well you know what I&#39;ll go through what I would do in each case but number three is the most most complicated if we have a dogee right here I would wait to take my entry until we break the low of the dogee right there so if I was going to go short I would be shorting as soon as that level breaks or if I was holding to the long side I would sell as soon as that level breaks right there and I would get out okay so that&#39;s the spot right there where I&#39;d be exiting if this is a dogee if this is a shooting star same thing shooting star I would getting out or uh taking a short position the second this next candle breaks the low of candle number one so this a two Candlestick pattern that&#39;s one this is two the second this candle makes the new low candle under candle I&#39;m out of the trade now if we had a hanging man candle this one&#39;s a little bit trickier because usually here&#39;s the problem we want to be going uh getting out or going short for candle under candle but it closed way up here which means if this candle goes red we wouldn&#39;t be shorting until way down here that&#39;s already forming kind of a longbody candle and that may be basically the full extent of the correction so in this particular case I would consider a break of the low of the candle&#39;s body right here to be my indicator to get out so right here the second it breaks the low that could be an indicator to get out now this is a little bit tricky because it&#39;s not officially candle under candle until you&#39;re way down here but if this is a long candle wick I may not want to hold that far down so that&#39;s going to be the most complicated um of the three potential choices that you have for for reversal candles okay so let&#39;s say that we got a dogee here and then the next candle was a small body red candle and I&#39;m just going to switch to this pen here for a moment so small body red candle okay so we did a candle under candle so I&#39;m out of my position or in this case because news just came out I never even took a position yet I&#39;m just watching we get another small body candle so this is candle in this pattern candle number three now I suppose in truth this is at this point a five candle pattern because it&#39;s not a pattern without these big green candles these create the context but we don&#39;t need to count the candles in the pattern because it doesn&#39;t matter how many are in it so what we know here is that we have these three candles that went up that squeezed higher let&#39;s go ahead on this side and draw this a little bit larger so you can see it more clearly okay so we had the breaking news we had candle number one we had candle number two again don&#39;t don&#39;t need to count it don&#39;t know why I&#39;m counting it again and then we have this candle here that pull pulled back and another candle here that pulled back so now at this point we&#39;ve seen the move up we&#39;ve seen the dogee that indicated a reversal we&#39;ve got a pullback for the first candle a pullback for the second candle now I&#39;m starting to think about first candle to make a new high and a move back up my first profit Target will be a move back to the high of day which is up here right up in this area but I&#39;d like to see a move even higher so where do I buy I don&#39;t really want to buy just right here because the price might just keep trending lower now if this candle had a bottoming tail here what does a bottoming tail communicate buyers so this is something that would be desirable if we saw this bottoming tail that would be desirable but regardless of whether or not we see the bottoming tail I&#39;m going to wait for the first candle that makes a new high so making a new high is when the price of this candle breaks the high over the previous candle so we go from making a new low a new low a new low relative to the previous to now making a new high now there are times where we will have a candle um at the bottom like this where it opens it dips down and it closes here and it&#39;s green but I don&#39;t usually buy this candle because we haven&#39;t yet made a new high so I&#39;m still a buyer on this candle right here but I may be buying almost the moment this candle opens because remember if we close here presumably we&#39;re going to open it more or less the same price and now we&#39;re going to be opening into that first candle moving up so this is a time where I&#39;m going to be pretty quick to jump in and it is bullish because we have that bottoming tail right there and then we&#39;re starting to Surge back up and this is the setup that I trade this is now a multi Candlestick pattern and this Candlestick pattern has two longbody candles one standard dogee one small body red candle one possible Hammer candle hammering out a base giving us a little bit of a reversal this in this context would not be a hanging man because a hanging man only occurs at the top of an uptrend a shooting star only occurs at the top of an uptrend a hammer occurs at the bottom of a pullback so this is a hammer even though it&#39;s the same Candlestick shape the context is what gives it the name CU at the bottom it&#39;s bullish whereas at the top it&#39;s starting to be a little not so great all right so then I&#39;m I&#39;m entering down here this is a place where I&#39;d be a buyer right here I would buy this would be my Max loss and let&#39;s say this is a ratio of $100 approximately dollar amount so then I want to be able to make approximately 200 so this is 100 plus 200 plus right so that&#39;s what we would be looking for a 2:1 profit to loss ratio and getting out up around this area now if you can do this and trade with a 2: one profit to loss ratio you only need to be right 33% of the time in order to break even that&#39;s just a statistical fact so if you write 50% of time 60% of time 70% of time well then you can be doing really well so for those that are curious my trading has been between 65 and 70% over the last8 years which has been good and I produced over $10 million of net profit after fees and commissions I&#39;ll say again my results are not typical but they are verified they are audited you can see that on my website if you&#39;re curious and it is trading more or less the variation of this strategy and several others exclusively using Candlestick charts to help me understand my best entries and exits so this is a standard multi Candlestick pattern that we would typically call the bull flag so bull flag bull flag a few candles going up a couple candles pulling back and then first candle makes a new high now in addition to the bull flag we have an ABCD pattern so I&#39;m going to teach you the ABCD pattern here ABCD now the ABCD pattern is a little bit different um it&#39;s similar but what happens on the ABCD pattern and we can do this one as a um oops we&#39;ll do this one here as a little gravestone dogee and then we&#39;re going to pull back and then we&#39;ll just say um we do a little bottoming tail there and then we move back up right here but in this case you see how we have this dogee up here so these topping Tails they&#39;re really tough because it shows that the price could not hold that level so in this case we come back up to this level but we don&#39;t go through new highs we sell off again we dip back down and this is now creating an ABCD pattern a b c and what do you think is d d is the next leg up right here so what we look for on an ABCD pattern is the price to come back up and on the second attempt it goes through the high so well wait a second but this is just a bull flag you&#39;re right this is a bull flag and I would still take this trade but it doesn&#39;t go all the way to the first profit Target and so as soon as we have a red candle that makes a new low candle under candle I get out this is still going to be a winning trade in this particular instance because I&#39;m in right here and I&#39;m out right here it&#39;s just a small winner it pulls back again and then what I know is that the more times this resistance level is tested the more likely it is to break so I can do one of two things for an ABCD pattern I can get back in right here at Point C which is basically a bull flag pattern but the second attempt I will do that as long as there&#39;s enough room to get profit out if it comes back to high a day this is the high right in my hand at resistance so as long as I can make a little bit of money from right here to right here I&#39;ll take the entry here if it&#39;s too close together the word I won&#39;t be able to make money if it just runs into resistance I&#39;ll wait until it looks like this level&#39;s going to break and then I&#39;ll get in right here for the breakout and my stop is at the low of the pullback although that&#39;s a larger stop what we know about this pattern is that this longer period of consolidation serves as coiling and building strength for that final break through that level and so we often see a really big breakout off of the ABCD pattern so I always teach people the bull flag first because uh an ABCD pattern includes a bull flag that ultimately did not resolve all the way to the upside and then it turns into that ABCD pattern now there are also times where we end up with what we call a um ma uh pullback I&#39;m just going to abbreviate it here a moving average pullback and in a moving average pullback we have this sort of similar one two big green candles whatever dogee at the top it dips down a little bit first candle make a new high squeezes back up isn&#39;t able to break through pulls back again comes back up one more time can&#39;t break through pulls back again you know kind of Dipping down and basically at this point I&#39;m going to stop trading the first candles to make a new high because we&#39;re just sort of pulling back at this point typically we&#39;re looking for support around a moving average like the 9 EMA the nine exponential period moving average this is going to be on a a 1 minute or a 5 minute chart and then once it&#39;s tapped this level this level creates support and then that&#39;s when we&#39;re more likely to finally break away but initially at the very beginning of the move it may be a bull flag it may be an ABCD pattern and both of those fail but I&#39;m still going to keep watching it this is not a picture perfect pattern when it goes sideways for this long but the question is is the stock that I&#39;m trading and in my case I&#39;m trading stocks but in your case you may be trading something else and that&#39;s okay am I trading the right thing am I trading something it&#39;s obvious that everyone else is watching because if you are you&#39;re going to see better resolution than if you&#39;re trading something that nobody is looking at things that nobody look at the only people buying and selling maybe is a couple of mutual funds adjust a position add a little sell a little but you don&#39;t have retail traders that are buying into it so when we think back about stocks like um GameStop right when we had this incredible move on GameStop that was driven by so many retail Traders watching technical analysis of course understanding the power of short interest and buying the pullbacks it didn&#39;t go straight up even in the areas where it made big moves it pulled back and went higher pulled back and moved higher and those are the areas where I was training it I was buying those dips and then looking for that squeeze to the new level and then once we get that candle under candle I was getting out letting it pull back not knowing if it was going to come all the way back down or just pull back a little bit and then get back in for that next leg up now if you want to continue learning about technical analysis and how to read Candlestick charts I&#39;m going to put a link in the description where you can download my 112 page PDF this is a resource you can download you can print it out and I encourage you to put those uh printouts around your your trading station and some of them are going to look kind of like this because you want to have these all around because your job as a Trader is to begin to visualize the pattern completed when we&#39;re trading in real time we only see the beginning part of the pattern we see the two longbody candles the one dogee the one red candle the second red candle and now we have to visualize what&#39;s going to happen next we use technical analysis to help us get a inclination of what we think is going to happen next But ultimately it&#39;s about pattern recognition and that pattern recognition the more times you see it the more you recognize it well it&#39;s going to build confidence so I encourage you to download that PDF I also encourage you to practice trading the strategies that you&#39;re learning from me in a safe simulated trading environment because look there&#39;s no business putting real money into the market until you first proven you can make money in a simulator and I&#39;ll tell you guys the market will be here for you it will wait for you I mean it&#39;s not going to wait for you but it&#39;ll be here for you and there will be other opportunities so don&#39;t feel that you should jump in with real money right now before you&#39;re ready you do that and you&#39;re going to lose money it took me years to get to the point where I was consistently profitable and it took me many more years before I got to the point where I made my first million dollars trading it takes time but pay your dues study up and hey you know what if you enjoy this episode hit that Thumbs Up And subscribe to the channel for more episodes about trading strategy just like this as I end this episode I&#39;ll remind you as always that trading is risky my results are not typical and there&#39;s no guarantee you&#39;ll find success as a Trader whether you trade with me or you learn on your own so manage your risk take it slow and I&#39;ll see you for the next episode real soon

Transcript for:Understanding Candlestick Charts for Trading

Transcript for:
Understanding Candlestick Charts for Trading