Mastering Candlestick Charts for Profitable Trading
Utilize technical analysis with Andrew Keene's expertise to enhance profitability. Learn about candlestick charts, bullish vs. bearish candles, and reading price action. Understand the risks involved in day trading, short-term trading, options, and futures. Enhance your trading skills by grasping the nuances of candlesticks for improved decision-making and potential profit gains.
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Using Technical Analysis to Improve Your Profitability Presented by Andrew Keene Past performance is not indicative of future results.
RISK DISCLAIMER Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. All trading operations involve serious risks, and you can lose your entire investment. No trades are recommendations or advice and we cannot be sued for losses of capital. All trades are for educational purposes only. Contact your broker or RIA for execution, margin, and other capital requirements. Everyone watching presentation adheres to ALL disclaimers on www.optionhacker.com and www.keeneonthemarket.com
Andrew Keene Andrew Keene - Floor Trader @ CBOE 10+ Years - Took $50,000 and turned in into multiple Millions - Has been called the Tiger Woods and Phil Jackson of Trading - Regular Contributor to CNBC & Bloomberg, Fox Business
What Are Candlesticks? Candlestick charts were developed in Japan and shows a trader what the price action in a given security is like over time. Anything can be plotted on a Candlestick chart: Futures Forex Stock Options ANY other financial security that trades
How Do We Read a Candlestick? We will teach you everything you need to potentially make you more PROFITABLE: GREEN candles are bull bars, and RED candles are bear bars. Source http://bit.ly/1s6dXvi
Difference between Bullish and Bearish Candles Why are some Candles green and others red? Source http://bit.ly/1s6ecqa
Learning to Read the Candlestick These bars are then plotted along an axis of time. Each bar contains a certain time periods worth of price action. The 5 min candlstick chart shows candles with 5 minutes worth of price action. All of these bars are plotted on a chart over an aggregate period of time and we have our candlestick chart. If you understand candles and supply vs. demand curve, it will INCREASE your profitability.
E-Mini S&P 500 Futures on the daily candle with the Cloud
Why Does a Trader Want to Use Candles? There is no such thing as a one day event If a trader is trading on a 1 day event they are doomed Most events take 3 days or more to fully price themselves into the market An aggressive trader can trade on a 1 day bar. This should be a good risk vs reward set-up and have a good probability of winning.
There are 3 Main Chart Types Learn How to Determine What Type of Chart You Are Looking At: 1. Indecisive: This is a chart with many overlapping bars trading in a range. These charts continue to fail breakouts. We will look at an example on the next slides. 2. Reversal: Reversals are important to spot. They help traders spot entries and exits and will help a trader spot some of the most profitable setups. There are many types of reversal patterns. 3. Continuation: This is a stock that has broken to the upside and will continue to be bought pullbacks. Pullbacks can be very profitable setups. Stocks in continued trends are our favorite stocks to trade. We will look at examples on the following slides.
Strong bull trend in AAPL. A trader could buy any pullback to the 9 period moving average with a stop below the cloud. This is a profitable setup.
A similar strategy would have worked in in DPZ. Notice that every pullback after the cloud breakout was bought.
Again the setup works very well in MO. The stock is so strong that any pullback is bought in the name.
How to Trade Each Chart Type The Indecisive Price Action Chart: It is important to recognize this chart because generally speaking we will not be looking to trade these stocks. That does not mean that there are no setups in stocks like this. Some traders like them. Buy Low Sell High Another great example can be seen in the GE chart, a trader could always look to sell between $27-$27.50 with a stop above $28.50 and buy between $24-$24.50 and look at how many times it has been a profitable trade.
A trader can sell in this range And look to buy in this range
Candlestick Patterns Every Trader Should Know Since reversals are so important most of the patterns we talk about will be reversal patterns: Reversals are important to spot. They help traders spot entries and exits and will help a trader spot some of the most profitable setups. There are many types of reversal patterns Types of Reversal Patterns: Double Top Double Bottom Three Black Crows Three White Soldiers Tail on the Bottom Tail on the Top Higher Highs and Higher Lows Lower Lows and Lower Highs
Example of a Double Top LAKE is a stock that saw some huge moves on news of Ebola breakouts in the U.S. I belived the stock was overbought but that it could continue to move higher. On 10.13 and 10.14 we have a double-top where the high of the day is the same two days in a row. This could be a great reversal set-up. On 10.14 the stock closed almost at the low of the day. This is a very bearish formation.
Stock makes similar highs on 10.13 and 10.14. The 10.14 bar closed on the lows
A trader could have sold stock on the close at $21.33 with a stop at $30.33 Lets see how I would set up targets
Setting Profit Targets in LAKE I set my profit targets as soon as I am in a trade. That way I have well defined risk and reward setups at all times. Trade: Sold stock on the close at $21.33 with a stop at $30.33 Risk: $9.00 per share Profit targets set as a percentage of stops Profit Target 1: 50% of stop = $16.83 Profit Target 1: 100% of stop = $12.33 Profit Target 1: 150% of stop = $7.83 Profit Target 1: 200% of stop = $3.33 These might seem like extreme targets but keep in mind LAKE was trading in single digits at the beginning of the year.
Three Black Crows More Confirmation in LAKE: We can see here that there is another even more bearish pattern forming in LAKE. This pattern is know as Three Black Crows 3 bearish candles after a large run higher Big signal of reversal 10.14, 10.15, and 10.16 show this pattern in LAKE
Three Black Crows, a very bearish formation. A trader could have sold stock on the close at $20.70 with a stop at $30.33
A trader could have sold stock on the close at $20.70 with a stop at $30.33. This has a trader entering later but on a stronger setup.
Setting Profit Targets in LAKE I set my profit targets as soon as I am in a trade. That way I have well defined risk and reward setups at all times. Trade: Sold stock on the close at $20.70 with a stop at $30.33 Risk: $9.63 per share Profit targets set as a percentage of stops Profit Target 1: 50% of stop = $15.90 Profit Target 1: 100% of stop = $11.10 Profit Target 1: 150% of stop = $5.35 Profit Target 1: 200% of stop = $1.50 These might seem like extreme targets but keep in mind LAKE was trading in single digits at the beginning of the year.
Bullish Reversal Patterns Double Bottoms: Just as we looked for double top patterns we can look for a bullish reversal pattern in the form of double bottom. AMZN gapped lower after earnings but formed a possible double bottom at 10.24 and 10.25. A trader could have bought the close on 10.25 at $289.97 with a stop at $283.50 Lets see how the trade panned out.
As we can see this trade worked out very well after this bottom was formed.
Bullish Reversal Patterns While this was a strong pattern in AMZN a trader could have waited for an even stronger setup know as Three White Soldiers Like the three black crows pattern the three white soldiers is a stronger signal of reversal. AMZN produced this pattern on 10.24, 10.25, and 10.26 This is a very bullish pattern and while it would have the trader enter the trade later it is a much stronger setup.
The entry is at the close of the 10.26 bar at $295.60 with a stop below the recent lows at $283.50.
Setting Profit Targets I set my profit targets the same way that I always do. Trade: Bought stock at$295.60 with a stop below lows at $283.50 Risk: $12.10 per share Profit targets set as a percentage of stops Profit Target 1: 50% of stop = $300.65 Profit Target 1: 100% of stop = $307.70 Profit Target 1: 150% of stop = $313.75 Profit Target 1: 200% of stop = $319.80 ALL of these profit targets would have been hit in AMZN
Reversal Patterns Both Three Black Crows and Three White Soldiers are better signals for entry on a chart. They are stronger because they are taking into account more price action. They require more risk, stops are wider. A trader is waiting for more price action and price momentum to the upside. These are two of the strongest reversal signals but there are several more reversal patterns that also provide great setups.
Looking for Tails on Tops and Bottom of Bars Tails on the bottom of the bar: Can be called a wick, a tail, or a shadow. This formation happens when a stock makes a new low then rallies hard into the close of the bar. Putting a long tail on the bottom This shows rejection of price at the lows. This shows aggressive buyers coming into the market pushing the stock higher. It is a signal to get long the close with a stop below the tail. The longer the tail the greater the risk but the stronger the setup. These bars are sometmes called pin bars. Look at the example of this in CMLP on the 10.24 bar.
A trader could have bought stock on the close at $17.93 with a stop at $16.63
Setting Profit Targets I set my profit targets the same way that I always do with a stop below the long tail of the bar. Trade: Bought stock at $17.93 with a stop at $16.63 Risk: $1.30 per share Profit targets set as a percentage of stops Profit Target 1: 50% of stop = $18.58 Profit Target 1: 100% of stop = $19.23 Profit Target 1: 150% of stop = $19.88 Profit Target 1: 200% of stop = $20.53 Again, ALL of these profit targets would have been hit in CMLP.
Tails On the Top as Bearish Reversals Example of Tails on Top in DSX: Look at the bar in DSX from the day after earnings on 11.24 The stock opened at $8.22, got as high as $8.66 and then closes on the low at $7.76. A trader could be shorting the stock on the close of the bar thinking that there will be more follow-through Look at the Chart setup
A trader could have bought stock on the close at $7.75 with a stop at $8.66
Setting Profit Targets I set my profit targets the same way that I always do with a stop above the long tail of the bar. Trade: Selling stock $7.75 with a stop at $8.66 Risk: $0.91 per share Profit targets set as a percentage of stops Profit Target 1: 50% of stop = $7.30 Profit Target 1: 100% of stop = $6.84 Profit Target 1: 150% of stop = $6.40 Profit Target 1: 200% of stop = $5.95 So far 1 target has been hit in this setup.
Candlesticks Show Trend Higher Highs and Higher Lows: This is a pattern that shows continued trend higher in a stock. It happens when a bars high is higher than the previous day high and its low is higher than the previous days low. It shows sustained trend in a stock. As a simple setup a trader can buy the close of a daily bar whenever this dynamic sets up.
Look how many times that setup would have been profitable in AAPL after earnings
Candlesticks Show Trend Lower Lows and Lower Highs: This is a pattern that shows continued trend lower in a stock. It happens when a bars low is lower than the previous days bar and its high is also lower than the previous day. It shows sustained bearish trend in a stock. As a simple setup a trader can short the close of the daily bar whenever the stock sets up this dynamic.
Since 9.2.2014 FCX has been a sale on any rally. Look at the lower lows and lower highs.
Some of the Best Price Action Lower Lows and Lower Highs and Higher Highs and Higher Lows: This is some of the best price action and price momentum a trader can ask for. It shows opportunities to buy strong stocks on pullbacks and sell weak stocks on rallies. Whenever I initiate a trade I always look for these types of trend as confirmation on the direction of the trade. Look for these trends with other indicators for confirmation of moves.
Some of the Best Price Action Lower Lows and Lower Highs and Higher Highs and Higher Lows: This is some of the best price action and price momentum a trader can ask for. It shows opportunities to buy strong stocks on pullbacks and sell weak stocks on rallies. Whenever I initiate a trade I always look for these types of trend as confirmation on the direction of the trade. Look for these trends with other indicators for confirmation of moves.
Candlesticks and the Cloud We have looked at several of the most important candlestick patterns but there are literally hundreds we could talk about. Lets talk about using candles with the Ichimoku Cloud, my favorite technical indicator. I use the cloud to day trade almost every single day. Adding candlestick analysis to my entries and exits helps makes my setups even more likely to be profitable.
Look at how profitable this buy signal was in TWTR. Why was this such a strong setup?
The Best Setups Possible What conditions are present in the strongest setups? The stock opens, sells off and then finds buyers. The second bar of the day puts in a strong close above the cloud. The Third bar shows our indicator giving a buy signal which adds extra confirmation. In this case, would want to buy TWTR at the Buy Signal at $41.45 with a $40.65 stop
Setting Profit Targets I set my profit targets the same way that I always do with a stop below the cloud and the low of the day Trade: Buy TWTR at $41.45 with a $40.65 stop Risk: $0.80 per share Profit targets set as a percentage of stops Profit Target 1: 50% of stop = $41.85 Profit Target 1: 100% of stop = $42.25 Profit Target 1: 150% of stop = $42.65 Profit Target 1: 200% of stop = $43.05 A trader could move their stop to breakeven after target 2 has been hit in order to lock in profits.
The Best Setups Possible Im looking for the same things in a strong short setup Bars that are piercing the cloud to the upside or downside. A picture is worth 1000 words. Using candles and the cloud is extremely profitable. I use this type of analysis every single day and am a consistently profitable trader because of it. Look at how this works to the short side in FB on 11.28.
Very bearish open and a sell signal on the TOS indicator on the opening bar
Summary and Takeaways A picture is worth 1000 words, remember that nothing tells us what aggressiveness of buyers and sellers looks like better than candlesticks. The best setups are going to be setups with confirmation both the cloud and candlesticks. If you use candlesticks, and realize what they mean with PA-PM you have a better chance to be more profitable. There is no such thing as a 1 day event. There are 3 types of chart patterns a trader wants to focus on. Indecision Reversals Continuation We generally want to ignore the indecision charts but they can sometimes set up the opportunity to buy low and sell high trading in a range. Reversals can help a trader get out of a trades that may be going against them or time other entry and exit opportunities. Reversal patterns are important to recognize for traders of all types
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