Welcome to DTTW – how to day trade using price action – in this week’s episode we are going to start looking at specific types of candles and series of candles that you can identify in your charts, and use them to improve your price action trading.
If you use some software like the Day Trade To Win Atlas Line or TradeScalper to find your trades, you can definitely combine that with reading price action. Our day trading strategies are all based on price action, so it makes perfect sense combining those automatic trading signals with reading price action.
You can of course also use price action alone to find trades, for times when the software does not provide any trading signals and you want to be actively trading.
BUT! Please always remember to refrain from overtrading. Just because you’re a day trader, it doesn’t mean you should be trading all the time. It is important to know when to stay out. So I recommend using price action not only to find trades, but also to filter out bad trades and knowing when to stay out.
Now, before we go into details and start looking at specific candles, you’ll need to understand how the pricing of securities work; whether it’s stocks or shares you’re trading, or forex, crypto’s, currencies, futures, commodities – all trading is a lot like a public auction – people in the crowd try to bid over the others in order to get the item that they want. The highest price that anyone in the crowd is willing to pay for the item gets it.
So if you are ready to pay more than everybody else – the item is yours! Congratulations! You just paid more than any other person in the whole world was willing to pay. You’re the one that’s left holding the bag.
In economic theory – and by the way, I’m sorry for being such a nerd – I sometimes like to mix my silly examples with economic theory because I’m a nerd with a master’s degree in economics and business administration and during my time at the university and stanford I came across a bunch of stuff that actually makes sense in real-life and helps me in my trading, so I’m trying to pass on the good stuff to you.
Well, anyway, in economics – There’s something called the “Winner’s Curse” which describes the phenomenon where a Winner at an auction tends to overpay because of emotional reasons, or because of incomplete information. The winner either pays too much, or the item is not as valuable as he and everybody else had thought.
MUCH like trading – we all know how bad emotional trading can be – if you’re willing to pay more than anyone else for getting IN you’ll be screwed. If you buy right at the top – well… you’re screwed.
And obviously with incomplete information you won’t last a day in the markets – so if you don’t really know what you’re doing – get a day trading mentor – our next Mentorship programme starts soon by the way.
Anyway, the stock exchange or the forex marketplace works slightly different than a regular auction, because prices can move up like we’re used to, but the price can also move down if nobody wants to pay any more than the current price.
See, the brokers and market makers always want to fill your position – that’s how they get paid – they don’t care if the price is $10 or $100,because every time there is a trade they are cashing in. They just want you to trade as much as possible. When you’re a broker the price is always right.
So when there has been a lot of demand for a stock and it has increased in price, then at some point there will be no more demand, because the traders think the price is getting too high. Well, in order to make money – the market makers start offering the stock at a lower price. They don’t care if the price is going up or down – they don’t get their cut based on how much they are able to increase the price, they get their cut every time somebody buys, so they always want to find the optimal price where the trades are going to happen.
The first type of candle I want to go through is what I call the “Big Green Candle”.
I have no idea if this type of candle or bar has any specific name. If you know of a real name for this, please drop a comment below – it would be interesting to learn.
Alright so the Big Green Candle is exactly what my suggests – it’s a big candle and prices moved up so it is green. Big Green Candle.
So, Let’s think about how this candle is formed.
OK, You know that the pricing of securities are much like a public auction –
And to give you a simplified explanation of what is actually happening behind the scenes — the market maker asks if anybody is willing to pay the current price. And if yes, then the market maker fills all the open orders at that price. Then when there are no more orders at that price, he tries increasing the price one increment and asks if anyone is willing to pay that price. And if there are traders willing to pay that price they will get filled. Then, because there is more demand for the security, the price is increasing all the time as long as there are buyers, as long as there is a lot of demand.
So for the duration of the big green candle the price is going up, and the more demand there is the bigger the volume bar is getting. If there wasn’t demand for the security, then the prices would not increase, because the market maker would not be able to raise the price.
Let’s consider a real life example, picture yourself at an auction. There is an item that you really want to buy, but you seem to be the only one who’s interested in this specific item. Now, if there is no demand for this item, if there is no other buyer than yourself, it doesn’t make any sense paying more for the item than the current price. It does not make ANY sense bidding over your previous bid, does it? If there are no other buyers, then you might as well try to pay an even lower price for the item – it’s not going to be sold anyway.
So when you see a big green candle, you know that there is a lot of demand. The bigger the volume compared to what is normal for the security the more demand. The bigger the candle the more demand. When you have a series of big green candles you know that the demand is not going away, but there is big demand over many candles. When you have a series of bullish candles, and the market is moving up – usually it is best to wait for a pullback before buying.
That’s it for today – please subscribe to our Youtube Channel, and please remember to share this series of Price Action trading videos in your social media. It’ll make you look great!
In our mentorship program, we will teach you more than 10 different day trading strategies that are even more powerful than this one. Our next 8-week day trading mentorship program begins soon, so make sure you sign up while there are still seats available.
Until next time – good trading!