All language subtitles for 1. Candlesticks

All right, guys, so welcome to chapter four of Day Trade Course.

This is a four-part chapter.

So this is going to be a bit of a longer day.

We've got the three main parts, and then we've got the FAQ section at the end.

So prepare yourself.

There's a lot of content that we're going to go over, but of course, for those of you

watching the recording, these are going to be separated into part one, part two, part

three, and part four.

So you can watch them in four sections, which is totally fine.

Now before we jump in to this class, and just to give you the overview, as I already said,

this class that we talked about yesterday and that we've kind of been leading up towards

is about candlesticks, setting up your charts, understanding technical indicators, and understanding

strong daily charts.

So these are some pretty important concepts that you're going to need to understand.

So if you have to watch this class more than once, that's OK.

Now one of the things I wanted to mention, the last two days of trading have been kind

of interesting.

Today's a Thursday, and Monday and Tuesday were fantastic.

We had some great trading.

On Monday I made, let's see, I made $4,900.

On Tuesday I made $4,200, and then yesterday I made $114.

Today I made $411.

Momentum in the last two days has really just kind of slowed down.

It's like you're in a sailboat out in the middle of the lake, and all of a sudden the

winds died down, and you're just like, what's going on?

We just had, it was just things were going great, and all of a sudden it slowed down.

Well, the wind can pick back up very quickly, but you have to be able to respond to these

changes.

So as an example, when you're on a sailboat, a small sailboat, like a two man sailboat,

when you're going strong and the wind's coming at you, you sit up on the edge and you lean

over.

You can put your straps, you can put your legs under the straps, and you can lean way,

way back.

Some of them you can even stand on the edge of the boat and put all your way back.

And that's because the boat runs fast, the fastest when it's 100% level, or as close

to level as possible.

So you get your weight onto the side.

And that way you can keep the sail really tight, you can go faster.

If the wind dies down, you need to move your weight into the boat, because as the boat

slows down, it's going to come back up.

And if you stay at the edge, you're going to fall in the water, you're actually going

to make the boat topple over you on top of you.

So this is kind of like with trading, it's easy to have tunnel vision and to just say,

oh, I'm just going to keep slamming these big orders, 5,000 shares here, 10,000 shares

there.

But you really need to be mindful of market environment.

Just like a sailor who's out on the edge of the boat, when the wind dies down and the

boat suddenly starts to come forward, they adjust, they move forward.

You have to be able to do that with trading.

And so as an example of that, for the last two days, I've been scaling back.

Now what I didn't want to do is have a repeat of what I did earlier in the month where I

lost $15,000 in four days.

What happened just before that is I had four great days of trading.

I made, let's see, I made $3,600, $5,600, $6,100, and then $8,800 over the course of four days.

So over $20,000, $25,000 in profit in four days.

And then on day five, I made $365.

All of a sudden, things slowed down.

Day six, I lost $3,500.

And day seven, eight, nine, and 10, I just kept losing more and more.

I didn't adapt as quickly as I could have.

So after this hot streak where all of a sudden yesterday, I only made 114, I was very conscientious

this morning that I would taper back my risk today, that yes, I would try to get a win

or two wins, but I would scale back unless I saw momentum was picking back up.

If I saw the wind coming back in, I'd get aggressive and get back out on the side of

the boat.

But until I see that, I'm going to be cautious.

And so that's what I did today.

And that worked really well for me.

I would much rather have two green days where I make $114 and $411 than have a day where

I lose thousands of dollars.

But look at the simulator today.

We had 501 students, 502 students trading on the simulator today.

Typically, about half of the students are green and half are red on an average day,

which makes sense for beginner traders.

Interestingly today, only 136 were green.

So that's much lower than average.

And the biggest winner was only $3,600.

So that's in contrast to what we were seeing earlier in the week on Monday and Tuesday

when I was showing you the leaderboard.

And even yesterday, we were seeing some traders who made a lot of money who were doing really

well.

Well, what we saw today is that even the best traders didn't do super well.

And most traders lost a good amount of money and gave back profit.

And in fact, some traders who didn't taper back their risk were losing in excess of $10,000,

which is crazy.

I mean, that's a lot of money to lose, especially in the simulator.

But of course, it's real money as well.

It's a lot of money either way.

So let this kind of be a real-time example of the importance of being able to adapt your

strategy to current market conditions.

If the market's getting choppy, it's a good time to pull back a little bit.

Because it's, you know what, a lot better just to have a few days where you don't trade

much at all than to have days where you're just falling deeper and deeper into the red.

OK.

So with that said, we're going to jump in here today.

And this class is really a continuation of what we were talking about yesterday.

Yesterday we were talking about the right type of stocks to trade.

And we were talking about some of the criteria of what made them the right type of stocks

to trade.

But I understand that you were lacking some of the information that you need to know,

like what is a good daily chart?

What are some of these technical indicators I was referring to?

What are topping tail candles?

What are doji candles?

So we're going to go over that today.

So this should help some of the concepts that we've already talked about make a little bit

more sense.

All right.

So why is this important?

Well, learning to read charts and to see the patterns in real time is a critical skill

for any day trader.

As day traders, we're focused on technical analysis.

100% we're technical traders.

So the technicals are the charts, the technical indicators, the candlesticks, the volume profiles,

all of that stuff, that's all technicals.

So you need to be able to understand them in order to be a successful trader.

For me, this was something that it took me time to understand.

I didn't get it right away.

As I said in previous classes, it was like looking at sheet music.

Because I don't read sheet music.

Even when I played instruments, I could never really, I could never get it.

I just, I don't know, I had to set a block for me.

I could never get past that issue of reading sheet music.

So to me, it's foreign.

And for a lot of you, looking at chart patterns will be very similar.

So going through things today, the candlestick patterns, the candlestick formations, the

technical indicators, and then we'll start getting into daily windows, gaps in windows.

And that's a topic that a lot of traders who have gone through this class in the past have

had questions on.

So I want to make sure that I answer all the questions related to the windows, because

I know it's a little bit of a complex topic.

All right, so when it comes to day trading, what does a candlestick refer to?

Well, a candlestick is one period in time, okay?

So when we look at charts, we're usually, we set a time period for the chart we're looking

at.

We're either looking at a daily chart, where each candlestick represents one day and time.

Or we're looking at a five minute chart, where each candlestick represents five minutes of

time.

Or maybe a one minute chart, where each candlestick represents one minute of time.

Now different traders will utilize different time frames.

Some really like using 15 minute and 60 minute charts, but for the most part, most active

day traders are using the one minute and the five minute.

That's what I use.

I used to play around with the 15 minute and 60 minute a little bit, but I don't find it

helpful and I'm all about keeping things simple.

So we're going to talk a little bit about the KISS strategy.

Keep it simple, stupid.

We're going to make sure you understand that.

You don't want too many technical indicators on your charts.

A lot of traders, they get their charts so busy with indicator after indicator after

indicator, that you start getting false positives.

You see two of them look good, so you get into the trade and it's not a good way to

find setups.

So as you will see, all my charts are very clean.

So different types of charts that different traders use.

These right here are bar charts.

We use candlestick charts and that's a specific type of chart.

A bar chart looks a little bit different.

You've got a line chart.

Now a bar chart does show you the important, the four important points that you need.

The open price, the closed price, the low of the candle and the high of the candle.

Those are the four pieces of information that we need to understand from any chart.

Unfortunately a line chart does not give us those four pieces of information.

We only have one single point for each period in time.

So line charts are kind of like what you see on CNBC and stuff like that.

They're fine if you're looking at the big picture like the S&P over the last eight months

or something like that, but it's not something that's helpful for intraday trading.

And then of course you have your candlestick charts.

So I believe candlestick charts are from the Japanese market and they've been, candlesticks

as a charting method have been around for a really, really long time and they are the

most popular type of chart used by active traders.

So each candlestick right here representing one period in time, this is a five minute

chart so each candlestick is five minutes.

Now when the market opens at 9.30, of course each candle will close then at a five minute

or zero interval.

So candles close at 9.35, 9.40, 9.45, 9.50, 9.55, 10 o'clock and it just keeps going like

that all day long until the market closes at 4pm.

So you can either look at your watch or look at the clock and with a second hand you know

exactly when each candle is about to close because they close right on the minute.

Now as I've said, day traders rely, I mean it's not just heavily, we rely entirely on

stock charts.

Stock charts are technical analysis.

So our job is to look at these charts and try to form some type of prediction.

Which way is this stock going to go?

We obviously want to be right 65, 70% of the time.

Is this stock going to go up or is it going to go down?

So we look at the charts and try to make this type of decision.

Now we use a minimum number of indicators, I do, to avoid complicating, overcomplicating

simple strategies and setups.

I'm going to show you the indicators that I use a little later in this class and there

are almost an infinite number of indicators you could use but there is no such thing as

the holy grail.

There is no indicator that's going to allow you to trade with 65, 70% accuracy by just

following it.

That doesn't exist.

I looked for it for a long time and it's not there.

You have to do the hard work, study, learn the pattern and then trade the candlestick

patterns.

The indicators are always going to lag behind price action and why is that?

Because those indicators really are a derivative.

They take price action, they calculate it and then they give you an output.

So price action needs to happen before the indicator can start to give you feedback.

So it's always lagged behind.

Now this is the breakdown of a candlestick.

So a green candle has the open price at the bottom of the body and the closed price is

at the top of the body.

This right here is the candlestick body.

That's what we call the part that's colored is the body, the whole part in the middle.

This is called an upper candle wick and this is called a lower candle wick, sometimes an

upper or lower shadow.

The top of this candle wick is high of that period and the low of that period is the very

bottom of the candle wick.

So the only difference between a green candle and a red candle is the open and closed.

So in a green candle we open low and we close higher.

So the body becomes green.

In a red candle we open and then we drop and close lower so the body is red.

So we know therefore because this candle went down, it's colored red, that the open is the

top and the close is the bottom.

Otherwise we would have no way of knowing, if they weren't colored, we would have no

way of knowing whether it was a red candle or a green candle and we wouldn't know whether

the low part here was the open price or the closed price.

So of course that's why we have these colored this way.

So let's see.

Now you understand what a candlestick is in terms of these four pieces of information.

But what's really interesting is that these four pieces of information, depending on the

range that the price has in the candlestick period, whether it's a five minute or a one

minute, will drastically change the shape of the candlestick.

So hammers and inverted hammers are a certain type of candle.

So a hammer occurs at the bottom of a downtrend.

And you can see here, this is a hammer candlestick.

So it looks kind of like a little mallet, a little hammer.

It's got a little body up at the top and it has a lower candle wick.

This is what a hammer looks like.

Now the body can be either red or green.

That doesn't make a huge difference, but you always have a small body at the top and a

lower candle wick.

So what does this candle tell us?

This candle tells us that the time period opened, we sold off, right, because we have

this lower wick.

And then during this candlestick period, buyers came in and brought the price back up.

So that shows strength.

That's why this is considered a bullish candle.

When it's in the context of a hammer at the bottom of a sell off, it's considered to be

hammering out the base.

So you kind of hammer out the base like that.

The reason is because buyers came in and bought this stock up off the low.

If we closed at the low right here, then there was no buyers.

It just shows continued weakness.

This is a long body candle, long body.

So we have the open and we just sold off the whole time and we closed basically at the

low of the period.

But with this candle we opened, we dropped down and then we came back up.

So if this was a green hammer, then it would show that not only did we open, sell off,

we came back up and we closed higher, which of course would be even stronger.

So when we see that hammer candle at the bottom, it's a possible indicator of a reversal.

But this is just one candlestick.

A reversal requires more than one candlestick.

It requires a second candlestick to give us confirmation.

So the confirmation would be when this green candle, the one right after it, breaks the

high of this candle.

This shows continued strength.

So usually when we take a reversal setup, we look for a hammer at the low of day and

then we buy the first candle to make a new high.

This was a little doji hammer right here.

A doji is when the candle opens and closes at almost the same price.

So the body is like really teeny, but it shows the same type of thing, the sell off and then

buyers coming back up and then it continued into the next candle.

So that's continued strength.

Obviously it didn't hold.

It came right up to our moving average and then sold off a bit more.

So right here, we get the sell off and come back up.

This candle goes higher, a little consolidation and then a move higher.

An inverted hammer is a hammer that's upside down.

So it's a hammer at the top of a move higher.

And what does it show us?

It shows us the same thing in inverse.

So it shows us that the stock squeezed up and then during that candlestick period, sellers

came back in or short sellers and brought the price back down.

So it shows weakness.

Now when the next candle makes a new low, that's a reversal.

So this is a type of candle that we look at as being a potential indicator of a reversal

because it shows weakness, but doesn't guarantee it.

We always wait for confirmation, which would be the next candle to continue lower.

And in this case, the next candle actually continued higher and then it kind of rolled

over here just for a moment.

So hammer candlesticks always occur at the bottom of a sell off.

Now, if you see a hammer candlestick in the middle of sideways consolidation, it's not

relevant.

I mean, it's still, I suppose, a hammer candlestick in terms of its shape, but it doesn't carry

the same significance.

When a hammer occurs at the bottom of a sell off, it indicates the bottom is getting hammered

out.

So the fact that the price dropped during that candlestick period, but then came back

up near the close is significant.

Buyers rallied to bring the price back up.

So in the context of a reversal, it could indicate that the stock is beginning to change

directions.

Now in the context of an uptrend, the same is true.

So we have this uptrend, we squeeze to the upside, sellers come back in and pull the

price back down, indicating a possible correction or a possible reversal.

Now the doji candle, as I mentioned before, is a candle where the open price and the close

price are almost the same.

So we either have, it's exactly the same or it's a really teeny body.

So what does that tell us?

That tells us that during this period, there was indecision and a hammer tells us that

a little bit as well.

But this says it even more because we ended exactly where we started.

Despite going up and dropping down, we're ending right at the middle.

Now the thing is, when a stock is on a really strong move to the upside, you don't have

indecision.

You have strong upwards momentum, lots of long body candles moving up.

When a stock is really weak, you have strong downwards momentum, lots of long body candles

going down.

So when you start to see candles of indecision, which are doji candles at the bottom of a

run or at the top of a run, it's indicative of a possible correction.

Traders are starting to get a little indecisive.

You can see right here, this is a doji that led to a momentary correction.

Now it was only momentary in this case, but other times this will be the top and then

we come way back down.

But remember, if you see a doji in the context of sideways consolidation, where the stock's

just going sideways, it doesn't mean anything because sideways consolidation is already

indicative of indecision.

So it doesn't carry as much weight.

This type of candle carries weight when they appear at the top of a run or at the bottom

of a run.

So in order for a doji to be created, the open price, the price must open and then either

fall or rise and then close right about at the same price.

So a doji candle always has a little upper wick and a little lower wick.

Now if the upper wick is really tall, sometimes we'll call it a topping tail.

If the lower wick is really long, sometimes we'll call it a bottoming tail, especially

when it occurs at the bottom of a sell-off.

The bottom of a sell-off with that bottoming tail or a topping tail at the top of a move-up.

So when the price is whipping around like this and forms a doji, it's indicative of

an indecisive market.

So any time a stock is experiencing a strong uptrend or a strong downtrend, indecision

at the peaks could indicate a short-term correction.

So during sideways consolidation, as I already mentioned, dojis are meaningless since sideways

consolidation already reflects indecision.

Now these candles are only indicators.

They don't confirm anything.

The confirmation comes from the next candle.

And sometimes it's the next two or three candles.

And when you put together one, two, three, four candles, that's when you have candlestick

patterns.

So in class five, we're going to be talking about candlestick patterns, which are multi-candle

patterns.

So those will be the bull flags, the flat top breakouts, et cetera.

But for right now, I want to show you the meaning of each of these individual candles.

So when you see them inside a pattern, you understand what they mean.

It's kind of like teaching you the alphabet before I teach you words.

And the alphabet, in this case, only has a few letters.

So it'll be pretty quick.

And then here are the long-body candles.

These are very strong, very bold.

They show strength.

It's when the market, the stock opens in this period and just surges up or surges down,

opening at the low, closing at the high.

So just a really strong candle, really strong candle, very decisive, showing a clear imbalance

between the buyers and sellers, in this case towards the buying side.

And then it's followed by two dojis and then this first candle to make a new low.

So the squeeze up and then starting to get indecisive at the top and reversing.

OK, so in contrast to a doji, a long-body candle shows extreme strength in the market.

The price opens at the bottom of the candle, then surges and closes at the top of the candle.

So when a long-body candle is green, it's a very bullish indicator.

When a long-body candle is red, it's a sign of extreme weakness.

I think this probably makes sense to you guys.

And for those of you who have been trading for a while, this is already something you're

pretty familiar with, OK?

But remember, candlesticks are only important on the right type of stock.

We don't care about candlesticks on the wrong type of stock to trade.

So our first job each day is, you know, number one, to manage our risk and understand that

we have max loss on every single trade.

Number two, it's to find the right type of stocks to trade.

So it's to basically, you know, go through and find the needle in the haystack.

And each day, for me, I usually find, like, four needles in the haystack, four stocks

to trade.

Now that I've narrowed down those four stocks, I'm going to be looking on those four stocks

for the dojis, for the hammers, for the chart patterns, the candlestick patterns, the bull

flags, and the flat-top breakouts.

So candlestick formations and patterns are only valuable on stocks that meet our criteria

for being stocks in play, in short, that have high relative volume and a strong trend, either

up or down, but that, of course, also meet the other four criteria for the six total

criteria of a strong stock to trade.

This is an example of a stock with very low volume on this particular day.

Even though you have candlesticks that form, they don't necessarily mean anything because

no one's really looking at them.

So if these candlesticks are formed, say, by, you know, algorithmic traders or something

like that, they don't carry the same significance as if they were formed by retail traders.

You know, a trader like you or me buying the stock and, you know, essentially all of us

buying stocks and then those candles get created.

They get created because of the buying and because of the selling.

So if that buying and selling is from algorithmic traders or whatever it might be, just a random

order here and there, it doesn't carry really any significance.

So if no one's watching the stock than any pattern that you think you're seeing, I mean,

it's not likely to resolve in the right direction.

Remember again, the job of a trader is to look at a stock and try to predict the price

action.

So we're going to use patterns to try to gauge whether or not this stock gives us a safe

entry opportunity, whether we can reduce our risk, whether we have home run potential.

So you want to be trading the stocks that everyone is looking at.

Those are the ones that are going to have the clear patterns and whose patterns are

going to resolve in a predictable way because traders buy them.

It's like a self-fulfilling candlestick pattern.

All right.

And candlesticks here during consolidation, these are essentially meaningless.

I mean, they really don't mean anything.

The stock is just going sideways.

So yes, you have a doji here, you know, a doji here.

You've got a long body candle here, but they really don't mean all that much.

Little hammer candle or inverted hammer there.

They don't mean that much because you're in consolidation.

The candlesticks have more meaning when you're seeing strong uptrend or strong downtrend.

So one of the ways you can kind of understand whether the stock is in a trend is of course

just by looking to see if it's moving sideways or moving up, but also looking at the moving

averages.

You usually want to see the moving averages curved up at an angle showing that the stock

is moving up.

The moving average is the average price over the last X number of periods.

So if it's angled up, the price has been going up.

If it's sideways or flat, the price isn't moving up.

Okay.

So steps you can take to get better at understanding candlesticks.

Make note of when you see multiple dojis in a strong move up because that's going to show

you that there's a good chance there's some indecision coming in as the stock gets extended

either to the upside or the downside.

Number two, take note of hammers and inverted hammers when you see them in the context of

the bottom of a sell off or the top of a move up because they're often the very beginning

indicator of a correction short term reversal.

Number three, remember that candles during consolidation don't carry a lot of meaning.

So of course I rarely would enter a trade during consolidation anyways because I want

to enter stocks that are moving up or moving down quickly.

That's where the opportunity is.

Buying stocks going sideways doesn't carry a lot of value for me.

All right.

So does that make sense for you guys?

Let's see.

And Jim comments that with respect to the gravestone doji, the saying in Japan where the candlesticks

were invented is that the gravestone doji, let's see, I've got to just scroll up.

Sorry, I just had it there and then I'll scroll down.

The gravestone doji, here lie the bulls who died defending their turf, interesting.

Brian says define consolidation.

Consolidation is when the stock is going sideways.

So there are sort of two phases of any stock.

One is consolidation and that's when kind of the stock is sleeping, it's resting, coiling

up, and usually coiling up, getting ready for the next move, either to the upside or

the downside.

So during consolidation a lot of traders will be sort of accumulating positions, buying

up positions, buying up positions, and then you get that accumulation and then you get

the distribution as the stock makes this move up.

So you get these two phases where you see stocks basically in general either going strongly

up or sideways.

Now, of course, you have some stocks that will just consolidate sideways for long periods

of time or make slight moves down, but generally consolidation is when a stock is just going

sideways and not doing too much of anything.

So if I bounce out of this here for one second, I can show you on the chart today.

Let's see.

So you can see right here, this is the phase where traders are buying it up, this is the

accumulation phase, we're moving up, and then this is the phase where it's kind of pulling

back, distribution, the sideways consolidation.

So coiling, coiling, and then getting ready for that next move up.

So we see these long periods of consolidation here and this is kind of the phase where traders

are usually sort of sitting sideways, shares are passing back and forth, and then we start

to open up and get the move higher.

So Carlos, the way that I know the time remaining on a candlestick, I can look at my clock right

here and this shows me how many seconds are left on this five-minute candle.

I know right now it's 1634 and 36 seconds.

So I know we have about 20 seconds left on this one-minute candle.

They will close at the minute and they'll just keep closing and closing at the minute

or at the five-minute period for five-minute candles.

But you could use, if you don't have a clock here, you could probably download a world

clock app on your computer and then just pop it up there and see the seconds.

So again, this is fairly straightforward I think for a lot of you guys so we'll just

move forward into part two of chapter four.