How to Read Candlestick Charts

Introduction: Understanding Candlestick charts is crucial in trading any financial markets, such as Forex, cryptocurrency, futures, or stocks. Simplifying the process and focusing on key indicators can improve trading accuracy.

Key Challenges

• Complex Charts: Beginners often use too many indicators, making the charts complex and difficult to read.
• Fear of Loss: Fear of making mistakes can lead to over-complication of trading setups.
• Seeking the Holy Grail: Searching for a perfect indicator that always works; this does not exist.

Simplifying Chart Reading

Step 1: Fewer Indicators

• Use Essential Indicators:
  • Moving Averages: Exponential Moving Averages (EMA) - 9, 20, and 200.
    • 9 EMA: Magenta
    • 20 EMA: Blue
    • 200 EMA: Gray
  • Volume Weighted Average Price (VWAP): Shows equilibrium point for the day (orange dotted line).
  • Volume Bars: Should be colored based on the open/close price.

Indicators Setup Example

• 9 EMA: Fastest, takes average price over last 9 candles.
• 20 EMA: Slower than 9 EMA, takes average over the last 20 candles.
• 200 EMA: Slowest, well-respected.
• VWAP: Below or above indicates bearish or bullish trends respectively.
• Volume Bars: Indicative of sentiment; higher buying volume shows buyer dominance.
• MACD: Helps to reduce false breakouts by indicating moving averages' divergence/convergence.
  • Signal Line (orange)

Chart Cleanliness

• Clean and simple charts are easier to understand and analyze.
• Too many indicators can lead to conflicting signals and information overload.

Step 2: Focus on What is Obvious

• Trade what is moving significantly rather than familiar names like IBM or Tesla unless they have high relative volume.
• Relative Volume (RelVol): Useful in determining high activity periods. Best when 5x higher than average volume.

Step 3: Building a Strategy

• Strategy Criteria:
  • Relative Volume: At least 5x higher than average.
  • Price Movement: More than 10% increase.
  • Catalyst for Movement: News or events driving the volume.
  • Price Range: Preferably between $2 to $20.

In Practice

• Volume Profile Analysis: Understand the buy/sell imbalances by analyzing the volume profile.
• Entry Point: First candle making a new high after a pullback is a critical entry point.
• Exit Indicators: Consider selling when price stops moving up, no buyers on tape, or when red candles form.
• Hot Keys for Trading: Configure to sell parts of the position to manage fear and losses.

Real-life Example

• Pattern Recognition: Importance of identifying and trading clear patterns facilitated by strong volume and clean charts.
• Success Metrics: Consistently profitable trades by focusing on strong indicators, clear patterns, and strategic entries/exits.