You're Probably Reading Candlestick Charts WRONG 💥 DAY 3 | Small Account Challenge transcript

welcome to today's Deep dive into technical analysis and how to read Candlestick charts as you may know I am in the middle of a thinker swim small account challenge with the goal of growing this account to $25,000 in my last episode I shared with you the only setup that I plan to trade during this challenge focusing on pullbacks on a stock on the front side of the move however I noticed in the comments some of you guys felt it was a little over your head and so I want to take a step back here and focus on making sure we lay a solid foundation in technical analysis in today's episode I'm going to teach you how to read Candlestick charts the right way now what you might know is that most Traders out there lose money and what's also true is that most Traders do not read technical analysis the right way the incredible thing about technical analysis and reading Candlestick charts is that this is a universal language of the financial markets in fact it doesn't matter if you trade Forex you trade cryptocurrency you trade Futures indices or you trade stocks like I do once you learn to recognize the buy and sell signals that are right there on the chart you're going to find trading becomes a lot more straightforward now I encourage you to grab a pen and a pad of paper and take some notes because I'm going to pack a ton of content into this full in-depth training and at the end of the episode I'm going to share some recommended reading for those of you guys that want to continue the journey so let's go ahead and jump in first thing on the Whiteboard now actually I'll put up my full screen here just for a second so you can see my p&l for today so today is day three of this small account Challenge and you can see that my account is currently sitting with $518 184 of profit that makes it another solid Green Day and so right now my accuracy during this challenge is a solid 75% that's about as good as it gets for me I'm usually averaging between 68 and 70% from month to month so being at 75% is really good and it actually exemplifies what happens when you stick with the rules right now I I laid out in my last episode the one specific strategy that I would be trading during this challenge now some people will say Ross there's a lot of different setups you could take why are you limiting yourself to just one and I said and I took an example from this book that I'll share with you right now thinking in bets by Annie Duke when she learned how to play poker she was a professional poker player who's made millions of dollars when she was learning how to play poker her brother taught her and he said these are the only hands that you should play It's not that be that it's those are the only hands that you could possibly Play It's because those are the ones that have the highest probability of winning and during a small account challenge this is when I have to sort of you know pull out all the stops and focus on my strategy that has the highest percentage probability of success because when you got a small account you don't have the cushion to take risks and unnecessary losses so every single trade has to count in my case because it's a cash account I can only take one trade per day with my full cash balance and then I've got to wait until tomorrow so I can't afford to take you know 1015 trades a day and figure well maybe the accuracy is a little lower but as long as I have enough time and enough trades I'll be able to make for it no I can only take one trade a day every trade has to count so the strategy that I was sharing with you in the last uh two episodes actually it requires a good understanding of technical analysis and so I want to take that step back here and lay this solid foundation maybe I should have already but let's go ahead and do it right now so first I want to break down the anatomy of an individual Candlestick now candlesticks have been around actually for hundreds of years they were created in Japan and they were used for trading rice Futures the person who cre created Candlestick charts actually created two different types of charts he created the simple Candlestick chart which we're going to see right here and he created the hakashi chart which is a blended average Candlestick chart now both are used today but this standard Candlestick chart is the most popular the reason it's popular is because each Candlestick just like this communicates four pieces of information so right here we have the open because this candle right here the way this was created was from four data points so we've got one point which is the bottom of this candle one point right here which is the top of the body one point right here which is the high and one point right here which is the low so those four pieces of information on a green candle are the low the open the close and the high now it's possible that you'll have a Candlestick shape of course candlesticks come in all different shapes and it's possible that you'll have an example where a candle opens and is also the low and closes and is also the high in which case it just looks like that because the open and the close are the same price and the clo the open and the low are the same price and the close and the high are the same price but what often happens is we'll have a stock where it opens the price declines a little bit then it comes back up it goes all the way up to a high up here and then it closes right here and so we con conect the open and the close prices to create this Candlestick body some people have it filled others leave it Hollow either way is fine and these upper lines are called candle wicks some people call them Shadows but they're called a c it's really called a candle wick it's the upper candle wick that connects to the high and the lower candle wick that connects to the low now for a moment I want you to contrast this among against a different type of um chart that a lot of people will use and by the way this is a reminder I'm glad glad I wrote this down pinned to the top of the comments and Link in the description there is a download for my thinker swim layout so if you want to use the same layout that I'm using in thinker swim there's a download where you can grab that there's also a download for my micro pullback PDF and my stock selection PDF so make sure you guys check those out because those are both pinned to the top of the comments and Linked In the description so a traditional line chart would be created kind of like this the last ated price is just plotted on a chart last price last price last price last price and so when you connect all of those individual data points you get a line chart and a line chart is fine and well and it's usually what we would see on CNBC or something like that when they're pulling up the price of a stock they're just showing you this rudimentary line chart but it actually leaves a lot to be desired because we can't really read the sentiment of what was happening in these individual periods all all we have is the one data point which was the last price traded but if we zoomed in on that and we said well each one of those data points represented let's say a minute of time what happened during that minute of time so let's say for instance that during that minute of time the price opened and let's just say the open price was $6 the price then declined down to let's say 575 then it squeezes all the way back up here to a high of well go all the way up to the top here to a high of $8 an incredible move and then let's say it drops back down and it closes right here so if that's the close then this is the shape of our candle now what would that candle communicate to you this candle to me that shape would actually communicate some weakness the reason is because you've got that large topping tail now the last PR let's just say the last price is 650 so on a line chart all you have is oh 650 Boop just the dot but what you miss out on is the context of what actually happened during that 60-second period of time and this is very important for active Traders because this communicates sentiment so a green candle opens at the bottom and closes at the top and the only difference between a green candle and red candle is that a red candle opens at the top and then closes at at the bottom so that's the open that's the close and then the high and the low are the same so we need the colors of the candles to be different and if you're color blind you could have one be Hollow and the other is is empty or solid so that way you can see um clearly that they're different but you need to be able to distinguish candles that are going up from candles that are going down because the open and the close are inverted so now let me step back here and I'm going to show you the anatomy of a couple of different unique Candlestick shapes this is the foundation in fact in fact I would say these are this is like learning the ABCs of the financial Market because each one of these Candlestick shapes that I'm going to share with you are part of Candlestick patterns that you will learn as you continue taking uh these CL watching these classes that I have right here and watching some of the other classes that I've taught so if a candle in its individual shape is the part of the alphabet then the Candlestick patterns that you're about to learn are the words and in fact the sentences these are just sort of the individual letters so a candle like this here is called a longbody candle a longbody candle opens near the bottom of the session and closes near the top and what does that candle communicate strong bullish buying sentiment the price goes up up up up up and it closes at the very top that's a very strong candle this candle right here is called a spinning top it has this small body and it has a upper candle wick and a lower candle wick and a spinning top with that name kind of signifies that there's a bit of indecision happening right here a little bit of a battle going on between the buyers and the sellers the price moved up but then it came down it moved down but it came back up and ended up closing in this case slightly green however this candle could also have closed slightly red and it would still be called a spinning top and it would still communicate the same thing which is that there's a bit of indecision there's a little bit of a battle here so the sellers well the the buyers are buying it up the sellers are pushing it down there's a struggle going on inside this candle this candle right here shows even more of a struggle the price has opened and closed at exactly the same place and this is called a dogee d oji a do candle opens and closes at the same price and typically has an upper or a lower candle wick a standard dogee looks like this where the upper and lower candle wick are about the same in size a long-legged dogee looks more like this where you've got this really long stretched out upper candle wick and lower candle wick so that's a a long-legged dogee and then if you have a dogee where it's just the top there's no bottom you know what that's called a grav Stone dogee it's an ominous name and it's an ominous Candlestick formation that communicates bearish weak sentiment now this candle clearly communicates indecision so let me present you with a scenario let's say for instance we had a stock that made a really nice move up it's showing what Candlestick shape is that long body long body but notice how the long how the bodies are getting a little bit smaller when this happens we can infer based on the shape of the Candlestick relative to the size of the previous Candlestick that the trend is getting exhausted what's typically going to happen here is we're going to roll over right the green candles are getting smaller and smaller and smaller in fact what might happen is they Peak at the top with a dogee a candle of indecision where there's a battle we finally culminate with that candle right there and a candle of indecision after a stock has just made a 5 10 15% squeeze up indicates that a reversal may be coming the confirmation would be if the next candle is red so if the next candle is red and goes lower that confirms the reversal is is in fact beginning and then we look for multiple candles of pullback but what's interesting here is that in the case of a standard dogee there's that indecision what about the gravestone dogee in the gravestone dogee the candle opens it squeezes up and then already begins to come back down so by the time the candle closes gosh the reversal has almost in a way already begun simply from this topping tail so what you'll learn is that topping Tails like this are bearish they're bearish because sell while buyers brought the the stock up sellers pushed the price back down so they indicate a reversal may be coming now now oops sorry about that now before I show you that Candlestick I'm going to show you another one here this one looks almost the exact same you've got that large topping tail and then we've got our our little body but in this case we're actually going to change it to Red so the whole candle's going to change red so now we went from having a small little body there to actually being a small red candle that's called a shooting star now A Grave stone is bad a shooting star is even worse why because a shooting star is not just an indicator that a reversal is about to start it's actually showing that the reversal has already begun right you've got the stock that squeezed up and now you've already got a red candle the next candle continuing that Trend down is just confirmation but the reversal really has already begun because that candle is red so a shooting star at the top of a trend is another weak Candlestick now let's look at um this one here so this Candlestick which I just started to show you is called a dragonfly dogee now this is a very interesting candle and it actually possesses a little bit of optimism depending on where this Candlestick occurs so if that Candlestick occurs at the top of a move you have the stock that's squeezing up and then all of a sudden here you have that little that little dogee like that that that uh dragonfly dogee the stock sold off but buyers bought it back up so it actually confirms that the reversal began and then reversed and when it continues higher often that you get a second wave even higher so we got a momentary pullback that immediately reversed but let me show you a different scenario okay so here's a scen a scenario where we have longbody red candle the price is declining but those long Body candles are getting a little smaller okay and then what do we culminate with at the bottom a standard dogee probably going to see a reversal coming back up right it's a candle of indecision indecision after the price has been very decisive indicates we may be seeing a reversal what if we saw the dragonfly dogee here if we saw the dragonfly dogee here it would just be like seeing the gravestone dogee at the top of an uptrend this tells us the reversal is already beginning and then there's our first candle that makes a new high and we look for a correction even further up what if this actually took the form just a little bit differently what if we have that bottoming tail but it's a small little red a sorry small little green body that candle right there is called a hammer the reason it's called a hammer is because it's said to be hammering out the base so the bottom becomes the base and it's hammering out the base this indicates the reversal has already begun so now we've got our dragonfly dogee and now we've got our Hammer so look at this you've just learned what is this six different candles we've got our Hammer we've got our dragonfly dogee we've got our shooting star we've got our grav Stone dogee we've got a standard dogee we've got a spinning top and we've got a long body candle which could be either red or green these are the basic fundamental components of every Candlestick pattern now we'll see Candlestick patterns of course That Vary slightly the candles will be slightly larger in size or the the highs or the lows will be just slightly different but once you learn the profile of what's Happening Here it becomes a lot easier to read price action so in the last class where I was teaching you the only setup that I'm going to trade I was actually taking um an excerpt right here from my full length strategies and scaling course this is uh from chapter 8 what is it chapter eight uh long setup part one and so what I want to do now is I want to show you how each one of these individual candlesticks that You' just learned about become the building blocks for that setup all right so the psychology here is we have a stock right now that is squeezing up all right so let's pretend it's 7 a.m. eastern standard time and we have breaking news so news has just come out on this stock and it doesn't matter what it is it's great news now we could just say it's a pharmaceutical biotech stock and maybe it's an FDA um announcement maybe it's clinical trials that are really great whatever the news is the stock immediately spikes up so the first thing that happens is a longbody candle is created you get that initial Surge and the way this works for those of you guys that aren't familiar I'm a volatility Trader so I don't trade things that aren't moving you don't make money trading things that aren't moving you don't buy something at five and sell it at five for a profit you need that volatility so what I found is that volatility is most predictable when it's right after a company puts out breaking news so I really have become a breaking news Trader and that's why I like trading early in the day because that's when companies usually put out news so Traders will see the news buy their stock and the stock goes up during the trading session now you can start trading as early as 4:00 a.m. with some Brokers but most Brokers won't let you start trading before 7: a.m. but either way you could trade starting early and I'll show you in this episode how you can actually use thinker swim and set up your orders to execute pre-market or after hours but we'll get back to that in a moment so right at 7:00 a.m. this stock has breaking news and you might say Ross how do you find the news well you know what's interesting is I spent a lot of time early in my career subscribing to very expensive news feeds so I could be the first one to get breaking news but you know what often I didn't know what to do with the news I would see this news headline and I would think wow that looks good I guess I would pull up the stock but it's not moving and I'd say well it looks like good news I'd buy the stock 5 minutes later 10 minutes later nothing's happening no one else cares about it well maybe I find out later that that headline is actually a rehash of a similar headline the company put out last week or maybe I find out that that headline really it doesn't really mean that much for that company and so I found it very difficult to try to interpret every single breaking news headline to figure out whether or not this was actually going to make the stock go up in fact what I found was a lot of easier was just to forget about looking at all the news headlines and just look at all the stocks right now at this moment that are actually moving up all right and then figure out why is the stock moving up so it's sort of a chicken or the egg type of thing where instead of looking for the breaking news I'm going to look for the stock that just made this Spike let's say this spike is up 15% in 3 minutes or even just one minute you might think that that doesn't happen but in fact it happens all the time we can look at this stock today uh that's right here on my chart this is a 5 minute chart of ncna and this is a 5-minute candle where the stock went from $5 a share up to about $6 a share so a solid 15% move and then it goes up to 650 to 7 750 goes all the way up to eight so you end up getting about a 30% move in 15 minutes that's what we love as active Traders and so naturally of course I I traded this stock and I was did did pretty well on it but we'll save that for a little bit later okay so the way I find the stocks are up 10% is actually on um this scanner right down here so I'll just make this a little bit bigger here for you so you can see it better so this scanner is called a high of day momentum scanner and this stock currently is hitting that scanner gnln the reason it's hitting that scanner is because it's actually hitting a new high of day right now so this is the type of stock that I would pull up and i' try to figure out okay why is it hitting a new high of day I see there's a headline here from 8:30 in the morning they're launching some type of um test strip I think this is for testing uh drugs inside a drink so if you were out at a bar you could use these test strips anyway so that's the headline that's what's driving the stock higher so now all of a sudden I understand the fundamental Catalyst that's driving the stock up and now I can look at the technicals and decide is there a place where I could buy this stock now as it happens right now it's about noon time it's not the time of day that I'm typically going to be really active trading I usually find the the peak volume and volatility is on the earlier side it starts to slow down and then gets really slow during the lunch hour and then it can pick up again in the afternoon going into Power hour and then into after hours but this is sort of a low during the day when I'm not as apt to take any trades but nonetheless the way I find these stocks moving up is using these scanners so what this scanner is telling me is it's giving me the details of the stock that I need to know that are relevant for for me it's telling me of course the current time it's telling me the stock symbol so that's the symbol the ticker symbol that I'll type in to pull up uh the quotes if I want to execute a trade it's telling me the price of the stock and one of the things that I know is that I perform much better on stocks of a certain price range and I learned this simply through trial and error I wouldn't have wouldn't have known it any other way so if I pull up my metrics right here you can actually see if we go to detailed that we we'll go to detailed this is uh $13 million right here in gross profit now by the way I always keep a copy of my audit pretty close by um this is my um my independent accountants report of my trading profits and this goes over every single statement that I've had in my account beginning on January 1st 2017 and the reason it's January 1st 2017 is because that's when I funded a small account with $583 so if we go back here say $583 January 1st 2017 by the end of 2017 I had grown that account to $335,000 trading the strategies I'm sharing with you right now today the following year I made 499,000 the next year I made 366,000 and I kept trading in this account I continue to trade in that account even to this date so that's all to say that my profits are um verified and audited and you can always check those out if you come over to warriortrading.com down in the footer you'll see my broker statements so now if we scroll down here what we can look at is price and volume and we'll see that I make money primarily on lower price stocks this is all my profits and you can see it's really in the five well between I guess $2 a share and $2 a share this is the the area where I do the best so because I know that when I see a stock on these scanners and I see that's in that window of the price I do best on I'm much more interested in you know pulling up the stock and taking a quick look at it if I see a stock on that scanner and it's $45 a share I may not even pull up the chart I may not even do any technical analysis because I immediately say nah it's too expensive it's not going to work for me it's not going to work for my strategy it's it's just not worth it so I check the price I see the volume and the volume is the number of shares that have been traded today and then I see the float now the float represents the number of shares available to trade so when a company does its initial public offering they do their IPO they do a big IPO and they sell a whole big block of shares onto the market let's say they sell 5 million shares from that day forward there are only 5 million shares available to trade during the IPO day all these people buy those shares and then from that point forward people are buying and selling buying and selling from the same pool of shares so on a day when the stock has breaking news and it starts to squeeze up if you wanted to buy the whole company well there's only 5 million shares that you'd have to buy and so let's say for instance that the stock has phenomenal news and on this day it's got a ton of volume let's say it has 50 million shares of volume on the one hand if it has 50 million shares of volume one person could have bought the entire float the entire number of shares available to trade but what typically happens is that thousands and thousands and thousands of retail Traders like you and I are actively buying and selling buying and selling and buying and selling as the price as as the volume changes hand the price continues to move higher and higher and higher because this 50 million shares of volume represents demand high demand as a result of breaking news and this represents Supply and when the supply is lighter than the demand the stock price squeezes up very quickly so when I see a stock on my scanners that has a float of less than 10 million shares I'm already thinking all right this is something that has a very limited level of Supply that means with a strong Catalyst it can make a big move now all this is broken down in more detail in the stock selection PDF that's pinned at the top of the comments and Linked In the description as part of the uh download uh there's a whole bunch of downloads that I've made available as part of this thinker swim small account challenge includes my thinker swim layout my micro pullback strategy PDF and a couple other things so you guys can check that out and you can download it and you can actually use the stock selection criteria that I've created if you want to use it for trying to build your own scanner or you just want to use it to better understand understand the right type of stocks to trade for the momentum strategy that I trade every single day so once a stock is hitting the scanner right here I can also check its relative volume which measures the total volume today relative to what's normal for that stock so if this stock normally trades on let's say I don't know 50,000 shares of volume a day and now today it's trading on 5 million shares of volume it's got 100 to1 higher volume ratio than normal its relative volume is 100 to1 and what I have learned is that stocks that have the highest relative volume ratios are the stocks that are usually making the big moves in fact I actually have a scanner right here called top relative volume and this scanner is just looking at the stocks with the highest relative volume ncna which is up today this is one of the ones that I traded and did well on in my main account this one's got super high relative volume it's got 554 times relative volume right the Stock's up 150% you've got bblg which made a big move drma made a big move these are all stocks making really big moves so the relative volume is an important metric all right so once I found the stock squeezing up right I found it on my scan I pull up the chart and this is what I see one big green candle just like this so this is the first building block of our chart and then what you what typically will happen is you'll have a second big green candle so we'll do a second big green candle here where the price is continuing to go up up and then usually we get a momentary pullback that's formed by a red candle now this is where we start to pay attention to the language is this a longbody red candle or is a small body red candle if it's a longbody red candle and it goes like this what message does that send that tells us that people don't like the news clearly there's more sellers than there are buyers because the price is dropping but when it's a small body red candle like this that tells us that although there are some people selling not too many relative to the buyers and the price is still holding up you see another small red candle here again very light selling small body candle and then what if right here let's just say for instance what if right here we saw a dogee what would we expect might happen next we might think this could be a reversal indicator so then what do we look for to happen next well if it's a reversal indicator then the next thing we would want to see would be this sort of imaginary green candle that makes a move higher right that's what we would want to see coming next so what we would actually do is we would pay really close attention as this next candle opens and we would be watching is it going to go red or is it going to go green and if it starts to go green the second it goes green and in fact breaks the high of this candle that's where I'm saying all right I'm jumping in and boom I'm buying in in the middle of that green candle right there so what I'm now predicting is that this was the reversal this is the first candle to make a new high and now the trend is making its way back up so one of the things that I've learned over the years is that stocks when they're moving up they don't go up like this that's not the way price action occurs what happens is you get these waves the price moves up and then it pulls back and then it moves up and then it pulls back and then it moves up and so when you have these waves you certainly could buy anywhere during the up wve but you may end up getting at the very tippy top and O it comes back down and so in fact I found the best place to get in is at the very bottom of this wave but boy that's challenging because how do you know that you're getting in at the bottom and then it's not going to just go lower and lower and lower right and so rather than try to buy at the very bottom and predict that the price is going to drop what I have to do is I actually have to wait for it to start to roll back up as it starts to squeeze back up so what's the first indicator that it might squeeze back up well if we zoom in on that little spot right there we zoom in on that the first thing would be watching to see if we have a dogee right we had a number of big green candles going up and then we had a couple of candles coming back down so if we have a dogee that could be our candle of indecision for a move back up what else could we have there well if we refer back to our alphabet of the building blocks we could have a uh bottoming tail or sorry a a hammer right here that would be fine we could have a dragonfly dogee like that that would be fine too so either of those Candlestick shapes could indicate that the reversal is already beginning so now we flip back over to here and what we have to be prepared for and this is what gets really interesting with trading is that we start to get really good at pattern recognition so if I pull up the slides here from uh my strategies and scaling course in this slide deck right here we were looking at that first candle that makes a new high so I'm going to animate this so you can watch it so the stock is squeezing up it's just hit our scanners it's moving higher but we're waiting for a pullback all right finally the pullback has begun we're dipping down we've got a green candle which is good we're starting to base out and I'm waiting for that candle to make a new high and boom right there the candle makes a new high so that's the pattern that we want to see now right here we could see green candle green candle green candle five green candles in a row a little pull back a little pull back and then the first candle makes a new high as it surges higher and this is the pattern that I absolutely love but of course to be able to understand this pattern you've got to be able to understand really the language of each one of these Candlestick shapes and the sentiment and the message that they're sending so when we look here we're already predicting what's going to happen we're thinking all right we have a stock that has breaking news it's popped up we're in on a pullback right here and what are we looking for well we're looking for this to move higher and so at some point here we're going to have to base out and then we're going to have to see the candle make a new high so basically we have three three possible options here we could have a dogee we could have a a dragonfly dogey or we could have a hammer or we could potentially have a fourth option which is just a small a really small body candle where it's getting smaller and smaller and smaller so the selling is getting exhausted for the next move up now these are sort of our four scenarios for a possible reversal backup it's also of course possible that the stock does not reverse back up it just continues to sell off and if that's the case we don't see any of our reversal candles and so therefore we don't take a trade there's no setup this setup requires a candle to confirm that the reversal has begun so now let's say here in this case we get this uh smaller red candle right here down and then we're going to get a little bottoming tail Hammer okay so now the next candle is going to go green it's going to open right here they open right where they closed and as soon as this candle breaks the high of that candle right there I'm buying all right so I'm in right here and that's about my entry price so let's say in this example my entry price is $3 a share what's my Max loss my Max loss on this pattern has to be the low of this pullback so let's say that's 295 I wouldn't hold all the way down to the low back here because that wouldn't make sense by the time the stock comes back down to here it's clearly selling off too much so for this to be continuing these nice waves higher it needs to pull back and then rally back up so what's my profit Target a retest to the high of day so let's say that's $35 cents let's just say for example so in that particular case we're looking for the squeeze through 315 and we'd be looking at a 15c profit versus a five yep 5cent uh loss risk on the trade so we've got a profit to loss ratio of 3:1 which is good that's a good profit to loss ratio in fact with a 3:1 profit loss ratio you could be right 25% of the time 30% of the time and you'd actually do just fine now I think it's better to be right 50% of the time or higher but but if you've got a really good profit loss ratio you can get away with being right a lot less than that so now let me show you this for one second I think this is important for you to understand because statistics are part of success in trading so let's say um profit loss and then accuracy so let's say you a your average winner and your average loser are both a dollar you only need to be right 50% of the time to break even right you cover your winners your losers your 50% accuracy but let's just say your losers are two and your winners are only one uhoh this is not good your losers are twice your winners on average you would need to be right 66% of the time in order to break even on the flip side if your losers are one and your winners are two you only need to be right 33% of the time to break even and so I always encourage traders to focus on trades where you have the potential to double whatever you're risking in profit so you have the potential for a 2: one profit to loss ratio now it may not always be sustainable there are times I found in my career where uh maintaining a 2 to1 profit to loss ratio has been tough especially when the market is a little colder or a little choppier now if we back this up right here and I look at my metrics let's just say from July through today uh whatever I'll apply this we'll say okay and let's look at my average winner so we've got about 442,000 of profit right here average winners $522 average losers $293 so it's not quite a 2 to1 profit loss ratio but it's pretty good and the accuracy here is 65% that's not bad and certainly the profit is not bad either but there have been other times where I haven't been able to manage that 2 to1 profit to loss ratio because I've been trading too aggressively I've been buying stocks that are a little too high and I've been letting my losses get a little too big so it's something you really have to be aware of and you've got to be careful about all right so if we go back to here what we know is that we want a 2:1 profit to loss ratio if you've got 3:1 4:1 or higher that's even better and one of the things that I encourage you to do and you could even do a screen grab if you want you could do a screen grab of this right here and then print that out in fact if you download my micro pullback strategy PDF there are screenshots in there that you can print out and you can put them on your desk so now you want to put around your desk basically the the perfect charts and the reason you want to do it is because you want to train your mind to see that pattern and to know what's coming because in the moment when we're trading we only see half the pattern we see the first green candle maybe we see the second we see the first red candle and now we have to visualize what's coming next the traders who make the most money are the ones who are able to essentially predict the future now I'm only able to predict the future a few minutes into the future but well enough that I've been able to make money and it's through the language of technical analysis this is the language of the financial markets and the incredible thing is once you learn to see and truly visualize these charts the right way you're going to recognize buy and sell signals all over the place and you're going to realize wow you know what I've been actually buying right into sell signals and that's why I'm losing I'm buying right into obvious sell signals I just couldn't see it before now once you learn to train your eye to see them you can't unsee them so we've got this example right here which is a stock where you've got these five green candles in a row you've got these two red candles a little pullback and then we look for that next leg higher I'll show you another example here so this is another example where the stock kind of going sideways and it starts to pull away right here right there you get that nice move up and then you get a little pull back a little pull back and notice that candle that candle has a little bottoming tail that bottoming tail is bullish the stock dipped down and it got bought right back up so you get a little bottoming tail we like to see a candle like that now this candle here has a small topping tail so it shows as we got to the top of the trend it was a little exhausted and it sold off this candle right here there's your long-legged dogee a big dogey that's a big whip so the stock got extended it sold off it bounced up all over the place opens and closes at about the same price but it takes you on a little bit of a roller coaster now I'd like to avoid taking a unnecessary trip on a roller coaster if I can help it so what I want to do is I want to try to really Buy on these waves down these little pullbacks right before the next wave up and then let it pull back again for the next wave up now there's a couple more elements that we haven't talked about that are part of understanding this language as you look at this chart you could probably see some other things going on we've got everything in this uh Paine right here we've got everything in this pane right here and we've got a couple of other technical indicators right through here so I'm going to share with you the way I have set up myart charts and I'm a big believer in keeping your charts as simple as possible so I'm going to share what I think are the most essential indicators that you should use and these are the indicators that I'm using as well so um so I'm going to just write my technical indicators all right so we're going to start number one with moving averages so a moving average is the average price of a stock over a set period of time so let's say for instance we've got 1 2 3 4 5 6 7 8 nine those are nine candles so if you took equals sum all nine candles so it be candle candle C1 through C9 and then divided by nine you would have the average price over these last candles that would be your average price it would probably be right down about here right it sort of be some somewhere somewhere in the middle most likely which fine but at any given time this is going to tell you the average over the last nine candles so this average is kind of constantly moving and what's interesting is that this average is always staying just slightly behind the price as the price is going higher so as the price is going higher you've got these nice green candles the moving averages lags just slightly behind so we've got our green candles going up right here and this gray moving average is lagging just behind but notice how it becomes support right right around here so a moving average becomes a level of psychological support when a price is above it and it comes down to it it also is a level of psychological resistance when the price is below it but comes back up to it now in my trading I use a couple of different moving averages I use the nine and I use the exponential moving averages because they're a little faster to react than the simple and I use the 20 EMA and I use the 200 Ma and I actually color these where the 200 for me is in purple the 20 is in blue and then my um my 90 ma is actually in Gray so I don't know this is not going to come out very well to gray I don't think but well that's kind of close yeah so so that's gray all right so I'll put a little more Brown on there just to gray it out a little bit spinch more n that made too Brown well you get the idea okay boy I really can't do one of the other it's just got to be like that so the 9 the 20 and the 200 these are the three moving averages that I use and I use them on all time frames now when it comes to time frames something that's kind of interesting is that when we've been looking at these charts I haven't made reference to the time frame that we're talking about so let's step back here to this side of the Whiteboard so when we're when we pull up a chart here and we've got a candle that has its open its low it's high and it's close we don't know context what is this this could be 1 minute it could represent 60 seconds of time but it could also be one day it could represent a whole day of price action so we have to kind of get oriented with what time frame we're on now as an active day trader you know what I'm going to focus on 1 minute 5 minute and daily charts Prim primarily but I'll also have a 10-second time frame so these are the four time frames that I use on my charts and so here's something really cool so we're going to break this into quadrants here and we're going to go like this so I'm going to start with a green candle down here and I'm going to say this is the daily so on The Daily we have a big green candle the Stock's up 50% so all we have basically is an open and it's squeezed straight up and we've got a huge green candle okay so if you pulled up the daily chart you would see the stock is up a lot but that wouldn't really tell you where to buy or where to sell it's just okay the Stock's up a lot so then we zoom into the F the daily and we look at the five minute so now this is going to be our five minute chart and on this what we're probably going to see is the stock had this nice rally up and then it pulled back a little bit and then I had another nice rally up and then maybe it pulled back a little bit more and maybe we're in this area here and then we just had this candle right there on the one minute what we get to do is we get to zoom in even closer so this last candle that's a big green Candle on the one on the five minute well inside it has five one minute candles what do they look like the first one let's say was green but maybe the second one was red maybe the third one was red and then maybe the fourth one was another big green candle and the fifth one was a green candle and all of that occurred inside that candle and all of this occurred inside this five this daily candle so this is the one minute and now this is the 10-second chart down here and inside this one minute pattern well you've got let's see 6 * 5 so you got what 30 30 10sec candles so inside the 10-sec candles you might have seen that the stock squeezed up and well I guess you had a couple nice big green Candles there so it squeezed up a bit and then it was pulling back a smidge but maybe inside there there's a teeny little green candle then it pulls back a little bit more and then it kind of pushes up but then maybe it dipped down here for just for a second and then it pushes a little bit higher and so something that's kind of incredible is how these are sort of fractals everything you see and everything that you're learning you can apply to any one of these time frames you could choose to trade exclusively on the 10sec exclus exclusively on the one minute exclusively on the five minute or exclusively on The Daily although what a lot of active day Traders will do is we'll use a combination of these time frames and so for me I'm really focused on this area I check the daily chart but once I see it's a big green candle there's not a lot more to look at other than checking to see is there nearby resistance and there could be nearby resistance if let's just say you know we zoomed into this daily chart and we saw you know well this is a stock that been selling off for a while you know but then it kind of popped up here had a lot of resistance then it sold off really hard and now it's coming back up right here and we're going to look at this and say well I don't know might kind of have resistance right around there right this might be a technical level of resistance that we have an issue with so aside from checking for resistance levels which we would do through horizontal but also descending and potentially ascending levels and and also looking at the 200 moving average on those daily charts we would say once we've done that due diligence we would put that aside and then we'd be focusing on our 5 minute 1 minute in 10c one of the things I can tell you is that if you have a phenomenal 10-second chart but the 5 minutes garbage the chart probably won't work if you have a phenomenal five minute chart in the 10 seconds garbage the stock will probably work anyways so the bigger time frames carry more weight than the smaller time frames so most important second most sort of decreasing not to say that 10-second chart's not valuable but these are so these candles are are so so short that any degree of strong sentiment that they're communicating is obviously shortlived because it's a 10-second time frame nonetheless I do find it helpful okay so on all time frames I use these indicators the nine the 20 and the 200 now the second indicator that I use is called vwap the volume weighted average price the volume weight average price is is actually a lot like a moving average it averages the price so it's equal sum you know C1 through C current all of those and it's also adding up all of the volume so volume from V1 through V uh through V current and then it gives you the average price of the stock factoring in the volume that took place as it was traded and these aren't uh indicators that I just came up with these are indicators that have been used and are well respected uh they've been used for decades and they're well respected by Traders all across um the financial markets and it's again not just the stock market Traders are using this in cryptocurrency and Forex and indices and large caps and everything so the volume weight average price uh I have it as a orange line here on my charts and that is the equilibrium price that really is like the average price of the stock over the course of the day so I really like the volume weight average price what I find is that when the stock is above vwap it's bullish when it's below vwap it's bearish so if we go back here and and actually you know what I'll just rather than do that I'll just show you um from an actual chart on a stock today so let's look at um let's look at this one for instance so this is an interesting one because this has really had a bit of a battle at the volume weight average price so the volume weight average price is that orange line and you could see we were above it and then below it and then broke above it and then came back down we were below it and then we were above it and then below it and it was really a battle this is really this one's really been struggling gnln what about this one uh well this one's just been solidly above it uh what about bblg bblg this one kind of trading um you know right around it as well it comes down to it and then it gets right back above it comes down to it well we'll have to see what happens so the volume weight average price it's the equilibrium price for the stock so it's that's the place that's sort of like slack tied neither the Bears nor the Bulls are in charge but when we're above the Bulls are in charge and when we're below the Bears are in charge so it's important to know your place in the market and if you're trying to trade to the long side and you're trading a stock that's below the vwap you're trading against the trend it's always going to be harder when you're fighting against the trend so number two is volume weight average price it's an intraday indicator it actually doesn't work on your daily charts number three we have volume bars so volume bars are a visual representation of the actual volume that takes place during each individual Candlestick period And this is extremely interesting because what the volume will tell us very clearly is how many buyers or sellers we have during this period of time so right here when we see these big green bars they're right underneath these green candlesticks so they're telling us how much uh buying volume we have on that Candlestick and this is especially telling when it's a nice profile like this where you've got that increasing volume and then light volume selling now imagine something like this where you have light volume buying and high volume selling now that tells a very different story right that tells us the price is going up on basically no volume but sellers are dominating in total who's who's in control the buyers or the sellers it's the sellers and you would know that even if you didn't even look at the the Candlestick shape you only looked at this right here you could draw that same conclusion that the the sellers are in control and so this is a vital piece of information to be included if you colored your your volume bars to always be like let's say blue they wouldn't tell you the buy and the sell and that you wouldn't be able to interpret the correct sentiment so you've got to make sure that they're colored based on the color of the candle so you understand is there more buying or is there more selling there's this there's this one this one yep these are both examples where there's a lot more selling so that's something that's really important to pay attention to so this platform that I'm using right here is called day trade Dash I've been developing this platform for the last seven years with my own development team and I built it out to be the ultimate dashboard for active trading and I really wanted it to be something that every active Trader would use I use it every single day in my own trading of course our members at Warrior trading most of them do as well but you can color these as You' like but it was very important to me that you were able to clearly see volume you have to be able to see the volume because the volume is going to tell you the story now it it gives you the context Behind These individual Candlestick shapes all right so now we've got uh volume and the next indicator that we're going to cover number four is Mac D now this is a really interesting one the macd is this is an acronym that stands for moving average convergence Divergence indicator okay so what does that mean well when a stock is moving higher and I'll just do uh individual lines here just to make it simple when a stock is moving higher well first of all the stock is moving higher like this and then we've got our volume bars down here so we'll have volume right here so we'll have volume right here so we want to see the volume is moving higher as well as the stock is moving higher we get a little bit of a pullback here and we want to see light volume pull back and then the the price surges back up like this we want to see buying volume goes back up too right that's what we want to see and then a little pull back here but what happens let's say if we see something like this what is that going to do to the moving averages well for the nine moving average which was coming nice and gradually it's going to drop it down like that right or for the 20 for the nine which was even closer it's going to do the same in fact they might even cross over the nine and the 20 might cross and if they cross what's going to happen is your moving average convergence Divergence indicator is going to send a signal so the the macd is right down here and what the macd does is it's oscillating like this and then it'll come back up and it goes back down and when the moving averages are pulling away the stock is moving higher because the average price over the last nine candles let's just think about how this works over the last nine candles as this price has been squeezing up the average price is going to be higher than the average of the last nine oh sorry the last 20 candles if you include another 10 candles back here 11 candles the average is going to be lower because the price goes back further so the nine is always going to be higher than the 20 except when you get a quick reversal when you get a quick correction well the nine could actually dip below the 20 because the longer period moving average is actually sustaining those higher prices because it's including some of these higher price candles whereas the nine is now waiting this big red candle more heavily so what ends up happening is you get this reversal and so I like to trade when the macd the orange line is above the signal line and once they cross over like this usually I don't want to take a trade so this is a very important indicator and this crossover is something I pay a lot of attention to I want to be trading when the macd is above the signal line because that tells me that right here we're on the front side of the move so if you watched um either of the other classes that are part of this series which is the um thicker swim small count challenge you'll know that I had mentioned I'm going to be focusing on one setup my absolute favorite setup that I think has the highest probability of success and that setup is trading stocks on the front side of the move when they're squeezing up and not overstaying my welcome by trading the back side so we pull up thinker swim here and you can see I'm up where's my there it is I'm up $518 today trading OBG so today this morning we had several stocks that started popping up ncna was the first one that popped up ncna comes up and this one right here I said you know it is going straight up which I like and I actually tried to take a TR trade on it but I did not get filled so I wasn't able to chase it and the trade that I tried to take on it will go into the 10-second chart was right around 650 so what I was looking for was okay first pullback following the fresh breakout right here we get the squeeze up we get that little dip that's the first pullback tried to get in and it ends up going higher without me my order got rejected it did not get filled and the reason it didn't get filled was because had made a mistake right here in think or swim the mistake I made was that when you're trading pre-market with thinker swim you of course have to change your order to an extended hours order and I clicked right here I just clicked the buy button and that's a stop order I have to press control to change it to a limit order as simple as that but that was my mistake I didn't press control to change it to a limit order I press stop stop orders don't work pre-market so my order got rejected and when it squeezed up I said well I don't want to chase it I can't afford you know I can't chase it if I miss my entry I miss my entry and it's better just to wait for the next one so this ends up squeezing up and I traded in my main account and that was just fine now in this little stretch right here the macd was of course open the macd is above the signal line and you're seeing that nice squeeze now actually I inverted it in my drawing uh the blue is above the signal line you could change your colors if you want but when the when the price is moving higher you'll see that it's open like this and then that first crossover is when things get choppy and although sometimes it'll move higher in spite of being crossed over the easiest trades for me are always on the front side and so for the small account challenge that's where I want to be trading so then the next stock that popped up was BN sorry bblg so bblg pops up it hits my scanner I pull it up and I'm like all right bblg I like the look of this one let's look for that first pullback so as bblg starts popping up I'm thinking where's the pullback where's the pullback and unfortunately what ends up happening on this one is it squeezes pretty much all the way to about $1.70 it pulls back only for a moment and then it pushes higher and I couldn't find any news I couldn't find any news to substantiate the move and so I thought if there's no clear news headline this will probably reverse I don't think I can trust it so I didn't take the trade on it I said nope I can't take the trade so that one's no good and then we had another one we had um let's see n was it envac um no it was um uh what was it um vrax sorry vrax vrax then pops up and or maybe I can't remember the order but anyways vrax pops up and when vrax pops up right here I tried to get in right here for the entry at 315 because I thought it popped up side was consolidation and I was too slow it goes without me it happens so fast next thing you know it's at 320 330 350 son of a gun it goes up to four h I missed it all right so I missed that one so then when OBG hits my scanners OBG hits my scanners and I'm like all right I'm not going to miss this one no way Jose so OBG hits my scanner right here I'm going to show you where it hit my scanner I'm actually change this to a 10-second chart this hits my scanner and I said I like the price and I like the float the price on this is $5 and the float on this is 698,000 shares so as it pops up right here I'm got to go back here so right here it pops up and I actually pressed the buy button right here right there we had a micro pullback it hits a high of six it dip down for a second do you see how you have that topping tail right there now you got to get zoomed in see how you have that topping tail so there's a little top what that tells me is that the price actually tapped $6 it then it pulled back just for a moment as it came back up I got in at six I bought right at $6 and the next candle let's watch it pops up to 624 excellent and ends up hitting a high right here of 637 now what did I say during my episode just the other day I said my focus is to trade the front side of this move right here so I made a couple of rules I said number one front side number number two macd positive number three price has to be most likely under 10 I can't trade higher price stocks because the account's too small number four uh goal is uh 10 to 20 cents and number five don't go back which is to say one trade get in get green don't go back get your 1020 cents so I got in at six it immediately breaks six it goes up to 630 640 I took my profit off the table and I'm thinking all right good job you locked up some profit now I'm thinking all right I've got my first little profit on this in my main account in my small account let's see if there's going to be another trade on this and what ended up happening on this one is and I'm really glad I took some profit the next candle it stalls out right here and it double tops what are these candles telling us a double top we tap this the sellers push it back down we come up again the sellers push it back down so now I'm thinking oh we've got resistance up here these topping tails are signifying weakness against this level all right that's a problem and so it ended up pulling back down it goes sideways for a second it comes back up but it just sort of levels out and it doesn't end up holding and I was like you know what that one trade that quick little entry right at the half dollar hold dollar was good but I was kind of disappointed and the reason I was disappointed was because we had some of these other stocks that made some really nice moves well gnln this one popped up that one's doing well nice doing nicely right now but bblg vrax we had ncna and several of them I tried to get in I didn't get filled and finally I get filled on one and it goes up 40 cents and then it rolls over so one of the things I think is really key about the strategy that I'm trading is that I focus on taking my gains I take my profit and then I go on to the next trade so now with $588 this account now has $1 4,472 35 the goal is $25,000 so I've got about 10,500 to go before I hit that goal now it might take me well at the rate of $500 a day it's going to take me 20 22 days to get there may and look there's going to be some red days so it's going to take some time but my goal is to try to keep locking up 500 a day as as frequently as I can I'm figuring $1,000 a week and the reason I figure that is because I don't think I'll find a great setup every single day and I'll probably have a red day maybe once a week I hope I can avoid it but it's not impossible so by focusing on high quality setups the quantity of Trades will go down but the accuracy will go up and you know what that creates a positive feedback loop so we're talking about positive feedback loops and trading this is something you got to be thinking about Focus first on a quality setups that will improve your profit to loss ratio which then improves your consistency so your calendar is going to have more green days which then improves your self-confidence so we'll do um we'll do iron Bells like lifting weights makes you feel stronger and then you're going to take bigger share size and then your profits are going to be bigger and then you feel more confident and you have this positive feedback loop but you know what if you're not careful you can find yourself on a negative feedback loop and that's what I've seen for so many Traders they get themselves on negative feedback loop where they trade with low accuracy they have low profit loss ratio they have poor consistency they have poor self-confidence and they start getting desperate they start getting frustrated and they start spiraling I want you to avoid that at all costs so what I want to encourage you to do is make sure you download the free downloads the free PDFs that are available for as part of this thinker swim challenge they are linked to the top of the comments and the description and want to make sure you subscribe to this channel to watch more episodes about trading strategy just like this you are scratching the top of the surface if you want to keep learning make sure you check out this book right here thinking in bets by Annie Duke I've got another one here by Annie Duke called quit that's a great book of course I've got my book right here how to day trade the plain truth we've got the Happiness Advantage by Shan acor which I think is terrific and we've got trade mindfully by Gary Dayton thank you guys for tuning in this episode I'm looking forward to seeing you for the the next one real soon I'll remind you as always that trading is risky my results aren't typical so manage your risk take it slow I'll see you back here for my next upload