How to Read Candlestick Patterns (Step-by-Step Guide)

[Music] Now, by the end of this episode, you're going to know the name for each 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 yesterday for students at Warrior Trading, and we're going to start by drawing a simple candle.

Candlesticks were created in the 1700s by a Japanese rice futures trader. They became very popular in Japan and then made their way to the West many years later. This is a typical candle, and it communicates four pieces of information: the open, the close, the high, and the low. Now, all of these candles here on the board also include those four pieces of information, but the difference in the shape is based on the differences 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 let's talk about how this works.

A candlestick represents a period of time. 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 obviously declined because it hit a low down here. So at some point it declined, and we don't know exactly how it declined, but what we know is these four pieces of information are 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. 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.

I'm an active day trader, and so although I use daily charts to help me understand the big picture context—if I like the daily chart, then I zoom in to shorter time frames to help myself find an entry—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 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 IPO'd 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 colorblind, they'll have 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, but for anyone else who has no problem, then red and green become the colors that you use, and 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 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 shadow or an upper candle wick right here, and it has a lower candle wick right here. This is a bullish candle because 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 bearish. We would prefer to see, of course, a stock open, squeeze straight up, and close, but that doesn't happen 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 are a small handful of candles that 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 because they're pushing the price back down, and these lower candle wicks are bullish, pushing the price back up.

The first candle right here is called a long body candle; it has a long body, as the name suggests. This is true with both red and green candles; they're both long body 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 they are candles; candles don't have shadows, but candles do have candle wicks. So I—from this point on in the episode—we'll just refer to these as candle wicks: upper candle wick and lower candle wick, and this is the body. So a long body candle has a very long body. Now if we go back over here, we could draw a—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 small and long body candles. So I'll just abbreviate SML: small and long body candles. Okay, so these both communicate—well, the longer ones communicate much more strong sentiment, and the smaller ones 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 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 long body 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 close are 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 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—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 long body candles; these are all—we'll just make it kind of small, but these are all long body 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 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. The first one is 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 high. 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 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 long body 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—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 indecision. However, 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—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—oops—a doji. There we go. So a doji candle is a candle that opens and closes at more or less the same price. A gravestone doji has this tall upper shadow; a dragonfly doji has a long tail down here, like a dragonfly does; and a long-legged doji is just a sort of long range here, and this is your standard doji; it's 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, 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 is that two-candlestick pattern going to the downside—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 this candlestick chart—and as we'll—as we'll look at on a couple others that we have right back here—we often will see that the price will sort of move in these 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 doji. 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 doji, and you could almost—almost call that a gravestone doji. It's not perfect because the body is a little bigger, and the tail—or the upside candle wick—is not huge, but it's close to that, and then this certainly is a long-legged doji. 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 these—these examples—we'll often note these large topping tails—right, large topping tail noting reversal—bottoming tail here noting a reversal from a pullback 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 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 gravestone doji down here—gravestone doji—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 doji, 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, which is very similar to this, but it's just a little bit different. So the gravestone doji 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, 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 doji that opens and closes at the same price right here, what happens if it closes two cents lower? What if it's four cents lower? Right? Does it really change the sentiment? Not significantly. And so if you call it a gravestone doji, 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 short-term 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/demand. There are buyers down here, and up here we have resistance/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 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 hammer, we've got our hanging man; 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—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—you know, let's just say this had squeezed up like this—the place I would have been a buyer would have been 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 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 or 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 dojis being candles of indecision? Dojis are only important—and I'll just—important when trending. So this is like stock market hieroglyphs. Dojis are only important when the stock is trending. In other words, they're not important when the stock is going sideways because what do dojis communicate? They communicate indecision. 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 dojis 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 reversal. Number two: hammers, shooting stars, and hanging men—which is also a doji variation—again, only important—only important during strong consolidation, 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 to 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—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, currency—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—the most extreme reaction to these signals, and an extreme reaction to a reversal signal is going to be a big move.

So 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 more of a hanging man when it occurs at the top—this is called a spinning top—spinning top—right here, same here—spinning top. So a spinning top—just like a top—it's just again, it communicates indecision, similar to a doji; it does have a small real body here, but it's just not very big, and this is more or less a long body candle but just has 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—this we already talked about in the context of a move up; it's a shooting star or potentially a gravestone doji depending on—depending on how big the body is. Okay, and then the dragonfly doji and the standard doji and the long-legged doji we already talked about. So separate sort of breakaway reminder on the dojis: we've got the long-legged doji, the standard doji, the gravestone doji, and the hammer—sorry, the gravestone doji and the dragonfly doji right there; those are four standard dojis.

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 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 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 high-frequency trading algorithms in the world. These guys are so good, and they've made—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 commodities contracts; it's true with currency pairs 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 into trade it because you see that there's a news catalyst that's moving it higher. So on the individual days when a large-cap stock has news, okay, I'll—I'll 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 5-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 rapidly 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 one of—one of my favorite patterns. So one of my favorite patterns here typically begins 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 from 9:30 a.m. until 4:00 p.m. is regular session, and then 4:00 p.m. to 8:00 p.m. is after hours. So most brokers will allow you to trade both pre- and after—pre-market and after hours—in addition to regular hours right here. And so you may have to change your order settings to enable pre-market or after-hours trading, but most—most 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 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 the difference between limit orders and market orders; not to get into the weeds here, but just—I wanted to mention it. Okay, so nonetheless, 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 10:00 to 11:00 a.m., unless the market's really strong, 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 1:00 p.m. in Europe, and you could trade until, you know, 5:00, 6:00 p.m. If you're trading in Japan, you're sitting down at 8:00 p.m.—7:00 a.m.—so 13 hours ahead—you're trading at 8:00 p.m., and you're finishing at, you know, 10:00 p.m., 11:00 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—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 8:00 a.m. here on this particular example, and immediately—instantaneously—the news comes out, and the price squeezes up. This happens; it just happens like in an instant. So the price squeezes up right here

I would be shorting as soon as that level breaks. Or, if I was holding the long side, I would sell as soon as that level breaks right there. I would get out. Okay, so that's the spot right there where I'd be exiting. If this is a doji, if this is a shooting star, same thing. Shooting star, I would be getting out or, uh, taking a short position the second this next candle breaks the low of candle number one. So this is a two-candlestick pattern; that's one, this is two. The second this candle makes a 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 long-body 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 reversal candles. Okay.

So let's say that we got a doji 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 pulled back and another candle here that pulled back. So now, at this point, we've seen the move up; we've seen the doji 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 the 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 of 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 at 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 long-body candles, one standard doji, 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 2:1 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're right 50% of the time, 60% of the time, 70% of the 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 last eight 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 the 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 doji—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 doji 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 the high of 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, 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, doji at the top; it dips down a little bit; first candle makes 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 one-minute or a five-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 looks at, the only people buying and selling maybe is a couple of mutual funds adjusting 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 trading 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 long-body candles, the one doji, 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 an 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.