Trading Using Candle Charts

Anyone new to day trading will have these basic questions in mind:

Buy or Sell? What to do?

How many shares?

Where to put the stop-loss?

Where do I book the profits?

Well if you understand Candle Charts, it's not that difficult to answer these.

I believe the following basic rules can help a lot..

• Set the chart settings to 5-min candlestick charts.

(Now, If you do not know what candlesticks are, please take time to learn them first. Google search for 'candlestick charts' will help. Candlesticks are very simple and uncomplicated, so please take some time and study them first. You need not know all the patterns. Just have an idea of how they are constructed and how to set them up in your trading software.)

• Spot the most recent candle with the highest volume. Let’s call it 1st candle.
• Wait till the NEXT candle, say 2nd (to the 1st candle) is fully complete.
• If the body of the 2nd candle is clearly above the body of 1st candle, the momentum is likely to be continued. Make sure that the second candle is fully complete before you check this. Have patience...give it some time to complete.
• Buy on a decline. A stop-loss must be placed below the low of the 1st candle.
• If the 2nd candle fails to maintain above the body of the 1st candle, it is likely to be a blow-off pattern which is a termination pattern. EXIT.
• SELL(short) the stock on a rally and keep a stop-loss above the high of the 1st candle. Remember, in this case…we are going against the trend and hence a stop-loss is compulsory.
• When the stock is in a downward momentum, the same rules apply but in the opposite direction.
• Keep booking profits continuously in small chunks. This is IMPORTANT.
• Assume that the stop-loss will be hit while calculating what quantity is to be traded.

Always ask yourself, "How much loss is comfortable to me if my stop-loss gets hit in this trade? So, how many shares should I trade?" This is very important to keep volumes under control and for an objective trading approach. Once placed, the stop-loss should NEVER be modified.

• Always UnderTrade. UnderTrade. UnderTrade. Trade only 50 shares when you feel like trading a 100. This is the secret to Long term profitability in trading.
• Never regret missed opportunities. Never chase a stock. In the stock market, when one door of happiness closes another opens. Don't keep looking at the closed door. Move on. Continue your search for new opportunities.   
• This also means, DO NOT GET ATTACHED TO ANY SINGLE STOCK. If you like any company, this should not mean you keep chasing it. Move ON.
  

Keep trading...