Here is a little secret only the best stock traders know: all money making chart patterns fall into just three chart patterns. In this stock trading training lesson you will learn what these three chart patterns are and how to use them to your advantage.
Stock Market Trading Training
When you first started your stock trading training, you probably went to website after website looking up the various chart patterns. If you include all the candlestick chart patterns, you probably tried to memorize a hundred different chart patterns. What I am about to show you is going to shatter the myth that you need to memorize dozens of chart patterns to get better at trading.
Swing Trading Training
The oversold pattern is easy to spot. The danger is that a stock you think is oversold, goes even lower. You can improve your entry on an oversold pattern by waiting for a candle over candle pattern that is confirmed by a break above 30 on the RSI.
When UNIS started to rip higher on the second day candlestick of the candle over candle, that was the time to make your move. You do not need to wait until market close for the candle over candle. If you think that by the end of the day, a stock will close up which will make it a candle over candle on the daily chart at the end of day, and it’s confirmed with an RSI break above 30, you can speculate by taking an immediate entry. Some traders use the Opening Range Breakout method to enter as quickly as possible on the second day of the candle over candle pattern.
The continuation pattern can be horizontal or slanted. It can be a basing or consolidation pattern and even an Ascending Triangle pattern before the breakout. Let’s take a look at some continuation chart patterns.
The blue area in the chart above is a basing/consolidation continuation pattern. The price action is fairly horizontal. The continuation pattern becomes a breakout pattern when the $4.98 resistance is broke.
The blue area in the chart above is a continuation pattern with an upward slant. The price action keeps coming down to the 50 day moving average and keeps bouncing off of it making an uptrend channel with higher lows and higher highs. If you buy this stock off of $27.60, then you are betting that the uptrend will continue. Notice that the RSI is not oversold at $27.60 so this is not an oversold pattern even though FXL has pulled back from its $28.64 high. Before buying off of $27.60, you are looking for a candle over candle reversal preferably after a long lower shadow candle.
The chart above is an Ascending Triangle pattern. Notice at the entrance of the pattern, PFPT formed an oversold pattern as confirmed by the RSI. It did a textbook doji with long lower shadow reversal, right as the RSI kissed the 30 line. It then did a candle over candle out of oversold. The blue section above marks the continuation pattern. An Ascending Triangle is a continuation pattern after the oversold entrance of the pattern and before the breakout above resistance. The continuation pattern is an up slanting trend line with a series of higher lows. Most often a continuation pattern will have an RSI that is flat-lining around the 50 level. A Descending Triangle is also a continuation pattern except the trend line slants down.
Breakout patterns occur when a previous resistance level is broke.
In the chart above you can see how an Ascending Triangle turns from a continuation pattern into a breakout.
Anytime support or resistance lines are broke, there is a breakout. In the chart above we have a downward wedge breakout.
In the chart of MM above, you will see how it transitioned between all three money making patterns. We don’t need a chart to transition between all three patterns in order to trade it. I’m just showing you the evolution of all three patterns. First you had the oversold chart pattern. The entry was on the candle over candle long tail to the downside candlestick. Then MM went into a consolidation or basing pattern. A basing pattern is a continuation pattern. Finally, a breakout pattern formed when MM broke above $6.71 resistance.
Now you understand why the oversold pattern is the best chart pattern to trade. The oversold chart pattern allows you to position into a stock before everyone else. If you work to enter on an oversold pattern, you beat the traders who buy on a basing or consolidation pattern. You really beat the traders who buy on breakouts.
This is why some of the best traders on Wall Street say that the breakout pattern is their least favorite pattern to trade. It’s because if you always buy on the breakout pattern, you are always arriving a little late to the party.
Stock Trading Training Software
The best stock trading training software that finds oversold and breakout patterns that you can paper trade against while you are in training is Finviz. Go here and sign up for a free Finviz account now.
After you sign up for a free account, log-in and then click on “Screener” in the upper left corner, select for “Signal”, “Oversold”, and for “Candlestick”, “Long Lower Shadow” (click on the image below to enlarge):
This screen will give you some sweet charts that you can research more and put on your watch list. Remember that the best entries come from a candle over candle reversal out of an RSI oversold. Do not jump in too early. It’s better to wait for the bounce or curl to begin.
Frequently Asked Questions about Stock Trading Training and $10,000 In 10 Days
What is a doji candlestick pattern?
A doji candlestick pattern shows indecision between bulls and bears.
The reason the doji candlestick pattern signifies indecision is because after the open, bulls push prices higher only for prices to be rejected and pushed lower by the bears. However, bears are unable to keep prices lower, and bulls then push prices back to the opening price. The opposite is also true. After the open, bears push prices lower only for prices to be rejected and pushed higher by the bulls. However, bulls are unable to keep prices higher, and bears then push prices back to the opening price.
A doji candlestick can be either bullish or bearish depending on where it occurs in a trend. If it occurs after a down trend, it is bullish because it suggests a trend reversal up could happen. If it occurs after an up trend, it is bearish because it suggests a trend reversal down could take place.
The reason that a doji candlestick sometimes signals a trend reversal is because the indecision causes the group that held the previous trend (bulls or bears) to doubt that they can keep the trend going. The opposite group gains confidence.
YourTradingCoach posted the excellent video below called Candlesticks – Vol 9 – Doji.
What is RSI oversold?
RSI oversold is when the Relative Strength Index (RSI) is below the 30 line.
The RSI is a calculated by:
Where RS = Average of x days’ up closes / Average of x days’ down closes.
The RSI can give false signals on a big market drop or move up. Also, the RSI can gyrate below the 30 line for long periods of time in a trending market. This is why the RSI works best in a trading market and it should be used with the other indicators and fundamental analysis tools.
Inovideosopens in a new window posted the excellent video below called How To Use The RSI Indicator.
InformedTrades posted the fantastic video below called How to Trade the Relative Strength Index (RSI) Like a Pro.
What are the most reliable chart patterns?
The most reliable chart patterns are oversold patterns, continuation patterns, and breakout patterns.
At least once a week I will get asked what I think about buying options on Facebook, Twitter, or the latest flavor of the month. These questions reveal a problem a lot of people have with their perception of what profitable trading is.
Profitable, money making trading is all about knowing what are the most reliable chart patterns, and then trading those patterns over and over again.
Buying options on Twitter or the latest tech IPO is not trading, it’s gambling. Try to change your behavior and move away from using your trading account as an outlet for gambling. Think of trading as a business where you can only eat what you kill.
The most reliable pattern is the oversold pattern. Continuation patterns are a little less reliable. Breakout patterns are even less reliable. Therefore, most of the patterns that you trade should be oversold patterns.
What is a double bottom chart pattern?
A double bottom chart pattern is when a stock drops to a certain level, bounces, then drops back down to the same level and bounces again.
A double bottom chart pattern is a bullish pattern.
The psychology of a double bottom is that bears have been rejected twice when they tried to take a stock through a support level. The bears lose confidence that they can continue to take the stock lower while bulls gain confidence.
A double bottom chart pattern is most effective when it takes place on an oversold RSI.
You can do a stock screen for a double bottom by going to Finvizopens in a new window and then clicking on “Screener” on the top bar and for “Signal” selecting “Double Bottom”, then clicking on “Charts”:
Sasha Evdakov posted the excellent video below called Stock Trading Chart Patterns: Double Bottom.
FinVidsDotCom posted the great video below called Double Bottom Chart Pattern.
What is a shooting star chart pattern?
A shooting star chart pattern is a bearish candlestick that signals a possible change in momentum from up to down.
The shooting star chart pattern is similar to a gravestone doji but it is not a doji because the opening and closing prices are not the same.
The shooting star chart pattern is an inverted hammer. The only reason it is not called an inverted hammer is because of where it appears in the trend or swing move. An inverted hammer at the bottom of a trend or swing move is called an inverted hammer. An inverted hammer at the top of a trend or swing move is called a shooting star.
The psychology of the shooting star chart pattern is that the bulls took the price up big but suddenly bears stepped in and took the price all the way back down so that the price closes near where it opened. This is demoralizing for bulls who now doubt they can keep the swing move up going. Bears gain confidence.
The shooting star chart pattern accurately predicts a bearish reversal 59% of the time. This is why, like with all candlestick patterns, it should be used with other technical and fundamental indicators. For example, the RSI should be overbought (above 70), the stock should be at a major resistance level where it has reversed down off of in the past, and there should be a bearish catalyst that will cause bulls to sell and bears to short.
InformedTrades InformedTrades posted the excellent video below called How to Trade the Inverted Hammer/Shooting Star Patterns.
What is a candle over candle formation?
A candle over candle formation, also called a candle over candle reversal, could be a Bullish Kicker:
A candle over candle pattern could be a flush or oversold pattern. A candle over candle pattern is a two day pattern and as long as the close of the second day of the reversal is above the high of the first day, it could qualify as a candle over candle pattern:
In the chart above, GNCA has done a sweet flush, with a candle over candle reversal coming out of an RSI oversold, with a sweet volume spike. That’s beautiful.
Here’s a candle over candle formation that took 3 days to get the signal:
The important lesson when dealing with candle over candle reversals is to not be too rigid with your definition of what a candle over candle reversal pattern is. In the chart of USAP above, after the doji on day one, an inverted hammer formed with the close of the day being almost even with the close of the previous day. This is not a good candle over candle signal. The long upper shadow suggests lots of selling near $30.50 and you don’t know if the price of USAP will just chop out and go sideways. However, the third day clearly closed above the close of both the previous two days and so we finally have our candle over candle reversal signal.
It is important that the candle over candle pattern occurs after an extended move down. You want the RSI to be oversold although that is not mandatory. The candle over candle formation should occur at some significant support area. Finally, the stock needs to have a history of bouncing and running off that significant support level.
This pattern has really helped to improve my trading performance.