In this episode, we're going to talk about the candlestick formations that are indicative of a reversal about to happen. This is a very specific candlestick and a very specific chart pattern that we see again and again and again. This is a continuation of what we've already discussed around Doji candlesticks And let's jump onto the whiteboard. So as you already know, if you watched my last episode on Doji candlesticks, a Doji candlestick is a candle of indecision And so if you have a stock that's had a really nice squeeze up that at the end of this five or six candle run, if you all of a sudden have this candlestick formation that's called a gravestone Doji that is a very clear reversal indicator is being communicated by the market.

Of course the the stock chart is a reflection of the market. So this is a message from the market. And the message is hey, sellers are coming in. Whether it's short sellers or long traders bailing out, there is an imbalance to the sell side.

The bulls squeeze the stock up and the sellers brought it right back down and we closed with this little tiny body. So a gravestone doji is absolutely a reversal indicator. However, what makes this an even bigger reversal indicator is when this actually closes as a red candle like this, let's see red candle. For some reason I keep my markers getting a little worn out.

so red candle like that and we would call that a shooting star. We would Also, some people would also call it an inverted hammer. So an inverted hammer is a hammer That is inverted. It's upside down, so a hammer looks like and I'll use my green marker.

Looks like this looks more like a mallet than a hammer. But that's fine. So this occurs in the context of a sell-off. All right now, we'll talk about that one in a second.

So the shooting star is something that I notice a lot because as a Momentum trader when I'm trading stocks and they're squeezing up, we often top out we have that long upper candle wick right there that then turns into a candle that closes red as a shooting star. That is a very powerful reversal indicator. Now, it's not a guarantee. It is certainly possible that the next candle could open, the dip gets bought up, and it miraculously squeezes all the way back up here.

But it's not very common if this does happen. it shows extreme bullishness, but it's not very common. What will sometimes happen is the next stock, the next candle will open and it squeezes up and you get a double top, which is a tweezer and this is again a huge reversal indicator off of this high level that the stock is unable to reclaim. So that's an even stronger reversal indicator.

And so some people that would take this trade their confirmation to go short is the first candle to make a new low versus the low of the shooting star. Their stop naturally is at the hot and so if this comes back up and attempts to break the high, they may still hold out on the position thinking that it's possible that this ends up turning into a tweezer top, a double top, and a second doji in a row in which case as it starts to retreat and drop back down. They could add to their short up here and set their max loss right here. Hard Stop.

Now, Yes, if it rips through, they're gonna get stopped out as it goes higher, but it's not common to see a shooting star or two gravestone dojis and then the stock continue higher and again. This is all about learning the language of the market and learning what patterns happen, how they occur, and what they typically mean. There is no guarantee there's no one that is right 100 of the time, but these patterns are right more than they're wrong When you are reading them correctly and that that's a big that's a big if because if you're not reading them correctly, you're gonna not be consistent. So this takes a lot of practice and one of the other things that I want to emphasize is that reading technical analysis and trying to really draw market sentiment from different candlestick formations, it really requires the stock that you're trading to have a pretty high level of relative volume.

It should have high relative volume, which communicates that a lot of traders are looking at this stock. Relative volume is a calculation based on average volume and average volume, and it's usually over 14 days right here. So if the a stock has average volume of a million shares average daily volume, it's a million shares over the last 14 days and today it has 2 million shares, the relative volume would be 2.0 It would be two times higher than average. All right.

So a relative volume of 10 therefore would have 10 million shares of volume. I prefer to only trade stocks with a relative volume of 5 and up. Now if you want to learn more about my strategy again, down in the description. you'll see a link to download my strategy Pdf which you can definitely check out and in that Pdf, I'm going to talk a little bit more, not just about technical analysis, but about my criteria for whether a stock is worth trading.

And so the things that I look at are relative volume, the price, the flow, and all these other things. Okay, but let's get back on topic here. Let's go and look at the next reversal candle. so the first one and we'll just draw it over here to remember it.

The first one is our shooting star or inverted hammer if you prefer. The second reversal candle is a traditional hammer and this is called a hammer because it's said to be hammering out the base. So if you're swinging the hammer like that, hammering out the base. So this is the low of the candle and because the stock sold off, it inherently shows weakness.

bearish. However, the bulls rallied the price back up and not only did it close above the at the open, it closed above it, which is very bullish. so that is a very strong reversal indicator and the confirmation of this reversal is then the next candle continuing higher and so that right there is our candle over candle pattern. It's a two candle formation which is also part of the micro strategy Pdf that you guys can download if you'd like.

That's something that I trade all the time a candle over candle formation. So the first candle is the I would call it the trigger candle and then if that trigger breaks which is the stock breaking over the high, that's my trigger. That's my buy signal to get in. The market's communicating that message to me just through the shape of this candle because the sentiment is that we have this long sell-off and now we're basing out and turning around.

So our first reversal is a Um is a shooting star or an inverted hammer and the second right here is a traditional hammer candle. These are the two most common and again, this is not to say that your standard gravestone doji isn't also a reversal indicator, or that your dragonfly doji isn't also a reversal indicator, or that your long-legged doji can't also be a reversal indicator, These five candles combined are all potential reversal indicators depending on their shape, their formation, when they occur. Of course, it's most significant when it's during a either the end of a big move up or the bottom of a big move down. If a stock is sideways, sideways is already communicating indecision.

So doji's during sideways are just communicating indecision during an indecisive period. That's not significant. It's only significant when these are at highs or at lows, and particularly when they're at highs or lows when the stock is also on at least four to five times relative volume. Okay, so what we've done so far in this technical analysis class: Through these several episodes that are part of this series, we've talked about the basic formation of candlestick and candlestick charts.

We've talked about dojis, and now we've talked about reversal candles. What we're going to get into next is talking about multi-candle patterns, including the micro pullback, and we're going to talk about this in the form of the bull flag. So check out the next video right there on the bull flag. If you want to go back to the video on the doji, check out that video right here and let's continue on to the next episode in the series.