How to Read the Candlestick Chart | Stock Trading Tutorial

How to Read the Candlestick Chart |  Stock Trading Tutorial

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Hello and welcome to another episode of the basics of trading with Prateek and me. Let's begin this episode with a quick recap of what we learned so far. We learned the process of opening a trading and a D-mat account. How to trade with a quantitative edge, and how to build a trading system. Did you know that there is a psychology involved when it comes to practicing technical analysis, and we actually can anticipate emotions like fear and greed, and this is only possible once to understand the psychology behind candlestick charts and patterns, and that's what we're going to learn today. Today's episode is gonna be packed with knowledge that I think you're going to be carrying for the rest of your life.

We're gonna learn how to read candlestick charts, patterns, line charts, what is the hammer, what is engulfing all of this and more on today's episode. But before we start, you know the rules just hit that like button, we've gone through so much effort to make this course, and leave a comment saying, Tanmay you are the candle to the darkness in my life. Whenever you comment it tells the algorithm to push the video to more people, so you'll be really helping other channel.

On that note, enjoy the episode. Alright, I'm really excited for today's class. Yeah, I mean we’re gonna learn technical analysis, right? Yeah, like I was first like let's make our trading system, let's make a system and then you said, no, you need to learn technical analysis to make a trading system so come on, teach me how to do technical analysis. Okay, So like we know technical analysis is study of price movement.

Correct. Right and we are understanding like, herd mentality is reflected, demand and supply is reflected in price. Correct. .

All right, and we have to learn to analyze that. Correct. So there are a few things you should know about price action. The first is that history tends to repeat itself. Correct. Okay.

So let me give an analogy. Suppose you know, let's look at a cycle. So, every winter, you know that you can buy air conditioners at a lower price, because who was uses air conditioners in December.

Correct, unless you are in Bombay but sure. Sure, and then you can sell it in the summer, because the demand is higher. Right. And this is a thing that will happen every year because it's cyclic in nature and human behavior will not change. People won't say okay, let me buy cheap A/Cs in December and January when it's cold.

It's just not going to happen, right. People will be like, it’s hot, I need AC. This behavior will happen every single year. People can probably save that, but they won't. A trader will probably do that. Got, it makes sense. Right, so history tends to repeat itself.

Basically, even as herds right, greed, fear, these things tend to repeat themselves in price action. The same thing, causes fear, the same thing causes greed, correct, no matter what price no matter what time frame, you're in. That's the first thing. So history repeats itself.

Got it. The second thing is that there are three kinds of trends. Okay, so fear and greed manifests itself over a long term in three trends.

So this bull, bear, horse. Yes, correct. It’s not a horse, so pretty nice glow table here. I'm gonna draw shit on it.

Yeah, excited. Let's do it. So it's very obvious right. If there are three kinds of trends, what trend is this? This is an upward trend. Correct, an uptrend.

Right, let's look at something else. So, what do you think this is? This is a plateau. A sideways, a sideways totally right, it’s just nomenclature but yeah, totally plateau or sideways. And then I'll just do the opposite of where we started, we have this, this is? This is sadness in the graph. This is a downtrend, this is the downtrend. So now, these are three kinds of trends.

Let's just break this down a little bit. Okay, when you're looking at an uptrend, I’ll draw an up arrow over here. What you're looking for, is every time it dips, that dip is higher.

It’s the high low. Yeah, it's a higher low low. That's right. Lets for example, this low is higher than this low. Right, Tanmay. And this low is higher than this low.

This is genius, right. I am a genius. So high five, very nice. All right, there you go. Super okay, so you're looking at higher lows every time so, if someone says, is the market up or down? You say let me check, if there was a higher low or not and all though it’s obvious right, but let's just define it, because eventually, we'll quantify all of this. Got it. So it’s important to quantify, whenever there is higher low, it’s basically an uptrend.

What do you think, forget the sideways, what do you think we look at on a downward trend? What do you think we look at? So we're looking at higher lows, higher swing lows in an uptrend, what we look for? Lower highs. Dude, that's amazing, man. It's totally right. So that's our first high. I'm not amazing, you're just asking very stupid questions, that’s it, I am not that smart. I'm trying to teach, well.

Where is the next high? Then it is here and here, these are the lower highs. That's right, it's perfect. Now, here’s the confusion, higher, higher, umm… okay, three trend, uptrend, sideways and downtrend. Simple. Got it. Okay, so we have this chart here.

It is Axis Bank. Now Ticker Tape will basically show you a line chart. This is what a line chart is. Got it. Now if you look at just this portion, from here to here. What trend is this? This is an upward trend.

Okay, before that? Before that this is a sideways trend more or less, like this feel sideways, and here there's a slight downward trend beginning here. Perfect. Okay, you scared me with that marker there. Yes. There is no screen guard here, so I am gonna mark here, oh it's an Ipad. Dude, really careful. Sorry, sorry.

Alright, so I have another chart over here of Axis Bank, but this is a candlestick chart. Got it. So I can see this a little more clearer, but just focus on the movement on the of the price, right. Now overall over here. Let's divide this entire chart into two parts. This is one part here. Okay.

And then there's this fall and then is up front here. What do you think is happening, those are from 2007, and we don't need to worry, don't stress on this is low or that is low, I'm just marking it for you. You just have to understand what it is right, let's not get into the details too much, so we have low here, we have a low here, we have a low here, we have a low here, we have a low here, a bunch of lows here, a bunch of lows here. Correct. Now, do you think that the lows that are marked are the higher lows throughout? No, I think, between 2012 and 2014, they were, the both the lows were pretty much the same.

Correct. So actually you only have one low which is the same, the rest are all higher. Actually, what you just did right you were looking way too close to the market, like this & that is happening, but all you really needed was like, oh, they are high. Generally the lows are higher. So it's an uptrend. Got it.

That's it right. Now you can go into this and be like, okay there is actually a low here, it's breaking but let's not get into that. Basically, there has been higher lows throughout. Correct.

It's been an uptrend. Only here can we say that it broke and things changed, but otherwise it's been uptrend. So this has been an uptrend. Correct. Okay.

Let's see another example. So, dude this is Pidilite. They make glue. You guess, Pidilite, the logo is the two elephants.

Yeah it's right. Yeah, yeah. Chutki me chuipkaye. Chutki me chuipkaye.

Fevikwik. Yes, they did not pay us to say this. No but, please, please do. So over here I'll just ask the obvious question, what trend is it? It's an upward trend. Super.

I think we're done here right. Thank you for tuning in. See you in the next episode. Let's see an opposite.

Let's see a downtrend. So Punjab National Bank is a downtrend. There you go. Okay. Yes.

Okay, so we'll see the last half starting 2017 onwards, what trend is this? This is a downtrend, and can you help me understand this, right. We said, lower highs, so. Correct. The pen, I want you to mark the lower highs over here. Lower highs? Yeah. Start here, that's your first.

What's your next? Lower highs, this is the next lower high. Okay. This is the next lower high and then it actually finds some, it tries to, it tries to, but then it doesn’t work out. Then this. This. Yeah, just stop right there, perfect.

So yeah, so maybe some of these I may say, okay maybe not this one, maybe not this one, but basically got the idea. You have one here one here, one here and it keeps going down. That's basically the definition of a downtrend.

Got it, at lower highs. It's funny that all of these are banks. No bank, Yes bank. Same thing Tanmay, as you can see there was the sideways period over here. Got it.

So this is where we begin. Okay, there next one, cool, the next one, yeah, here. Yeah, that's beautiful, right. This is what a trend is, so we learned two things about markets. One, just using price, history repeats itself.

We need to understand what repeats itself but it's something that repeats itself, because herd mentality never change, emotions don't change, and the second thing we learned is that the three kinds of trends. Go. Upward trend, Sideways trend and Downtrend. Super. So Tanmay, and the third thing is that markets discount everything.

What does that mean? So that means, if there is some news or analysis that the market knows is going to happen, it will already be reflected in price. Got it. Why is that right? Because there's such geniuses smart people, sitting down, reading news understanding everything, listening to management calls, they'll make inferences and they'll think so this is going to happen in three months, in six months, which the retail investor cannot know, right.

They won’t to spend too much time and basis of that they'll make their decisions. So if some, if there's an analysis, that’s going to happen after 6 months in a company, and retailers don't know, but a big, a group of big investors know, and let's say they sell. That’s a signal for people to be like, there’s something going to happen. Like news is really old. Once the news is broadcasted, it’s probably already been there for a while.

Correct. Right, so if you following the news, you're already really late. An example, Reliance, sometime back, they announced, and no one knew this, obviously, they said, Reliance said that we will become debt free. There are lots of debt, lakhs of crores, debt means loans right, and as soon as this was announced the market was like oh damn that's amazing, and the market gapped up, Reliance gapped up. It was a positive news, a good one, but now the market knew, analysts started following it, the deal is gonna happen, and then much later, during the course you remember right, Facebook invested, Google invested, it was like dude, 1.9 lakh crores has been invested. It's a lot of money, right.

They then had their AGM. In the AGM, Mukesh Ambani said, we raised so much money, and we are debt free, we are you going to be debt free, and we've partnered with Google and Facebook, and very proud of this. Now the common people will think, oh this is really great and they’ll probably buy Reliance on that news, but that's when Reliance fell. Oh, how come? Because, that news is already priced in. When news is out most of the times, the market already knew what's happening. So now, would you sit down and pour through all the financials Tanmay, and try to predict what’s going to happen, or just look at demand and supply of price, right.

So traders say that price is king, whatever is true is reflected in price, because when someone buys, you can see demand and someone sells, you can see markets falling, so just follow price. Correct. Simple. So, market discounts everything, price is king. Bad news, markets goes up. Maybe there's something else to it, just follow the price.

Don't follow the news. Got it, don't follow the news follow the price. Yep. That sounds good. So Tanmay, this means you know, how is more important than why. What happens is, market goes up, some stock goes up, people are like why did this happen? For a technical analyst, for a trader, it's actually the wrong question.

Why does it matter why it’s going up, it’s going up. right? You react to the price. There may be smart boys behind it, there may be some information that you don’t have, that you overlooked. Just react to the price, right. The price will show it’s way, for so even before the crash right, the price is falling way before a crash, and we'll see this, and.

You'll see in the trends. We see the trends right so, for example, in 2008 people thought markets are going up but uh oh, it did not happen like this. What actually happened was markets are going up, downtrend started, and then I can’t draw here, but a huge fall then ensued. So like for traders, they were short probably if they were trend traders.

They were trading on the downside or the exited all of their long term holdings, long time back. So I think for a trader, like seeing just this much part of the chart has enough indication that look, there was this high, and then there was a lower high. Yeah. This just means that either it's going to go sideways next or is going to fall further. Either way, or lower highs bad news. Correct, correct, more likely to fall than to go up.

At this point what I know is it’s downtrend. Right, at least it's not the time to buy, that's it. Correct, so you don't need to predict prices anymore, you can just follow price. Technical analysis is the study of price and its patterns, it analyzes the past, and it doesn't predict the future. So Tanmay we want to analyze charts.

So we need to analyze how we can actually plot charts, which is prices right okay and there are different ways to do that. Okay. Okay, so let's see different types of charts. Okay.

So I'll do here. The first kind of chart is the line chart. So let me guess, a line chart will have a line on it. That's right. Totally.

But how does that line form Tanmay? Cool so, let's suppose you have to record the temperature of Mumbai every single day, say at 6pm, you will get one temperature. We had done this in graph during school time. One data point for one day. And then you plot that.

You have time, like this, TIME. And then you have a value in this case it's temperature. Let me change this to prices because we're talking about stocks.

Now this dot over here is the closing price of the stock exchange, of the stock exchange. Now as we know, the stock exchange opens in the morning at 9am. That's right. ungodly hour 9:15 though, 9:15. That's right, and it closes at, 3pm, 3:30. You're off by like 15 minutes, for sure.

So 3:30, the last traded price of the day, that's the closing price of the day. Got it. Basically the last trade, where a buyer and seller agree to exchange something on that stock exchange or share on stock, and you have that. You have the closing prices and you just draw a line through it. Got it. That's the line chart.

Got it. Now what's missing over here. You tell me, what's missing over here? The price data only uses the close price of the day. Correct.

Whatever happened during the day, that volatility is not represented here. Correct. We only have the closing price, or we have the C, the close price. What's missing is the open of the day.

So let's say the market maybe opened here here. Alright, so let me write that. O, for open.

Then you may have a high of the day. So let's say maybe the high was maybe here. Okay.

H, that's the high and then you have the low of the day, maybe the low was here, you have the low. This popularly called the OHLC, the open high low close. This gives you all the data for that day.

Got it. Now, how does this actually look right. How do you represent this in a chart. It’s a candlestick. It's how you do this.

Got it. It's a visual way of showing all this information and you can see years of it very easily. This was a Close, right, I’ll just turn this into a bar and this is high.

This is now a candlestick. Got it, so close or open price becomes a chunky candle part correct, and these two are these wick like things, are the lows and the highs of the day. Simple. Got it.

And you can also color this green. Perfect. Green is, if it went up that day.

Perfect. Correct. Okay, so if the open was here and the close was here the market went up, it’s green, and this is the low, and this is the high. Got it. Now, we can have the opposite of this too. We have this right, and maybe during the day, I'll just remove this close to avoid confusion, I'll put a red beside it.

This basically meant, the open is here and close is here. That's it. Got it. So it's red and that's your low that's your high. So that's a candlestick right. It shows if the market was up or down.

Amazing, like it makes so much more sense when you look at a chart, now. Look at this right I just colored this it makes sense. When market went up then this happened, then this happened. Now you don't need to look at anything right you just know that the market went up, and then there’s a fall.

Something massive happened that day. And there’s so much information, a month of information in a graph. You can also see the size of the candles, how can see the high low. Here, for example, there was massive sell. It didn’t go low at all.

There’s no wick at all. Yeah see, correct. you change what I said. But, what do you think this means actually? This means that Tanmay needs to learn more.

Okay. So, we just leave at this. So these are, this is how we plot candlestick charts. Got it understood.

You asked me what this means right. Okay, wanna try that. This means that on this day, okay. There was a downward trend.

All right. In this in this period, and it went really low, like the lowest it's possibly ever gone yeah potentially and right there, consumers, right there, investors are realizing, okay maybe it's it shouldn't be this low, so then it found some support here, and then it started climbing up again and it ended up in this range on the at the closing time. Right.

Got it. Ladies and gentlemen, CNBC analyst Tanmay Bhat in the house. The name is Rakesh, Rakesh Jhunjhunwala. So what you just did was, you analyzed your price, it towards the end people pushed it up. This is what psychology is behind these patterns, okay. So you can actually analyze a few candlestick patterns and try to understand what's happening on the market.

Okay, so let me, let's continue that I'm going to remove this. In our example market fell a lot and slightly moved up the next day. Let's imagine, so now let's say the market opened at exactly the same place, close so, open the close there so it's a red candle closed slightly lower slightly lower, is the clue here, but during the day the low was really low. Wow. Okay.

Now this is interesting just explained to me the open and close. First of all, this is a very weird candle, yeah okay it's an upside down candle. This candle has no positive wick to it. Okay, so what happened the market opened here, at this price and it's close lower so your closes is here it opened here.

Perfect. And at some point after it opened, people lost their mind, investors just started selling, selling, selling, selling it reached here. Sure is when there was some support for it. Where investors went like it is way under priced right now we should probably buy it, and they pulled it all the way back until the closing price which is here. Interesting in this, do you see that there's more demand, or there's more supply.

It's clear that there's more demand right like for after it fell to this price suddenly demand increased for it. Yeah, like, I love this pattern this this candlestick pattern, it's called the hammer. Because it looks like a hammer.

Yeah, it looks like a hammer and, yeah, and calling it bad candle. The interesting about a hammer is, prices were pushed down because there was excess supply, it pushed prices down, and then at some point, there was no supply left, all the guys who were scared, fear, those guys are spooked and then out, there are no more shares to sell. Now the smarter guys come in and say, hey, this is gone really low because you guys were scared. Got it. And they start buying in, or they overpower the seller so much, that the demand pushes it all the way back up.

So we know over here. Now what news will say, market falls another 0.5%. Yeah, but what it doesn't say, is that it actually fell 5%, and then people realize it doesn't deserve to fall this much. Yes. Let’s pull it back.

So a hammer is an indication of demand being generated, again. So usually a hammer is a sign that it actually might pick up tomorrow onwards, all of a sudden there's demand, yeah, of course there's no guarantee there's no guarantee, but what we know is that there was demand here. Got it. It feels like this is like a mass exercise in trying to figure out the ideal price for a stock and everyone is giving their opinion by putting their money where their mouth is. Literally, correct.

Got it. And you can analyze this entire game happening on a worldwide scale, yeah, just using price. Yeah, it's like people are communicating without communicating with each other. It's great right? It's insane.

It's like this mathematical language that's happening, and no one knows who's who. Yeah. Or the interesting thing is, another point here is, let's suppose this is a really large stock right, so one thing any analysis you do has to happen on say top 50 companies in the country, right, because for any pattern to make sense, you want big money behind that pattern, right you don't want a small unknown stock with one crore worth, where someone can just put like one lakh rupees and change the prices.

Correct. You don't want liquid stocks right, so you choose the top 50 stocks ideally, to do any analysis you want to. Now, this turnover on a single day, like say a Nifty, could be 1000s of crores. Of course.

Right, which means if there's demand of 1000s of crores, it's most likely not a bunch of retailers deciding that. You don't need inside information to know that these guys are buying. There's institutional money coming in.

Correct. That's interesting. Right.

Okay, so let's see some examples, some real life examples. All right. Okay. Reliance example here, and this is a weekly chart, so one bar over here is a week, by the way, in a weekly chart what will be the open, and what would be the close on a weekly timeframe chart? What will be the open and the close meaning? So the open, I'll give you a clue. The open will be Monday’s, first trade. Correct.

It’s a weekly chart. . Yeah. So, when will the close be? Friday 3:30pm. Correct, and the high will be the high of the, of the week, and the low of the, week.

Perfect. So you're going higher in timeframe. When a pattern emerges in a higher time frame, there’s probably like a lot of money behind that. So it's more reliable. Got it. Okay, this is Reliance’s weekly charts.

Weekly candlesticks. So now we're here, market’s sort of going sideways, but just let us focus on the right side, okay. Market falls, falls, many red bars, and this happened, what is that the last bar over there, one minute. Okay, go ahead and draw. This looks like a hammer. Indication of a hammer usually is the hammer stick right, yes it's long and, you know, it's very dominant, it's a very dominant stick.

Yeah, so even the candle’s at the top, it's a stick that usually is a representation that oh that this feels like a hammer. Absolutely. Here. I'm assuming it climbed from here.

Yeah so we’ll exit this, yeah, go ahead. From this point, it will climb, or it did the next day, it actually gapped up, it actually gapped up, yeah. What does gapping up means? So gap up means it actually opened higher than the previous day's close. So, if it closed at 100, the next day it opened at 105.

How does that happen? Because there was massive demand in the night. This is interesting, right. There was some overnight news, how did that demand shop up here? But this is not overnight, this is giving Friday & Monday vibes, right. Correct.

So it's actually a weekend news. Yeah. Someone knew something's gonna go down, and go up actually.

Yeah. So that's interesting, right? Yeah. So you get that gap up, oh this is a big gap here, it's like 150 points almost, yes huge actually, and then the market continued to go up. Look at this right, it started at 1160, and it went all the way to 1600. Yeah, that's like, is that like more than 50%.

Yeah. So that's how powerful higher timeframes and analyzing candlesticks can be. So we've learned about the hammer stick candle. Sure, so like this how many more types of candlesticks are there? Sure, so, there are many other candlesticks, okay, this is a single candlestick there's multiple candlesticks, there is, there are indicators, there are patterns.

So technical analysis is pretty vast, this is like the first step. Got it. So if you guys want to learn more about that there are many many courses that can let you go a lot more in depth. Check out the link in the description and you can go learn it on LearnApp.

Awesome. So, this what we just learned right now. This is understanding one candlestick. Correct. Right so I'm assuming there will be patterns and that signifies something, if you look at two three different candlesticks when you bunch them together.

Yeah. Those must also have some meaning right. Exactly right.

So, what we learnt so far, hammer, is a single candlestick pattern. Correct. Which means you're learning a single candlestick and inferring whether there was a demand or supply. In this case, there was demand, there was demand. There are also multiple candlesticks, where it's a combination of 1,2,3 candlesticks, and you do the same inference, was this demand or supply.

Make sence, understood. So can you give me some examples of what, what inferences can we draw from looking at multiple candlesticks? So let's do a multiple candlestick example, okay. It's called the engulfing pattern.

Okay. Okay, so we learned about the Hammer pattern. Yes. Single pattern.

Yes. Let's see a pattern which requires more than one candlesticks. Hence the multiple candlestick. Yes. So what I'll do is, I’ll draw this here, I’ll rub this off. Now what happened over here, just explain to me, the market opened and then what happened? Market opened, then this week they hit the bottom everybody wanted to sell, then suddenly demand was created.

Then we start going up again creating the stick of the hammer. Yeah. And then closed, even though it closed below what it opened at yesterday, right, but it still, it still signifies demand.

So the demand is there. How is a different way of showing this, the same action can happen over two days instead of happening over in one day. So the same thing can happen over two days instead of happening over one day. I'll draw this.

Let's suppose the market, and this won’t actually happen I'm just drawing here for comparison. Got it, okay. Okay. So let's say the market actually opens at this, we have a candle here. I won't draw the wick so it's a little easier. The next day the market opens here.

We get this. Alright, now let me color this to know what happened. So this is a green candle. Right. And this is a red candle.

Now you'll notice, let's add some wicks, to make it look more realistic. All right, now you'll notice over here the market went down a lot, next day the market opened here and shot up till the highest price point here and closed here. And engulfed the previous candle. So this is called the engulfing pattern. What you're looking for is that this body, closes higher than the previous body. So like I'll draw another engulfing, this is one.

Right. Okay. And it could be this also right. This is also engulfing, because in this case, this is red, and this is green. So the green body actually engulfed the red body. Think of it like this, it ate it completely, like flames engulfed the house.

This opening, closing, opening, closing. That's it. It's basically the same thing that's happening right, market goes down, and then you get lots of demand. Correct. Basically, it doesn't matter what it looks like.

The price action basically the same. You know there's something interesting about people. We think news happens first and then price, but actually if you really look closely, like news follows price. So like, what you can do is you can find these patterns and then see the news of the day, generally the news will be like really bad, and then the next day for no reason, apparently, the market engulfs, and then the news will be like, wow something good is happening, because the market is looking, the long term suddenly looks good.

So generally, we shouldn't worry about what the investor’s thinking, the investors believe that demand is needed here that's why they're putting their money where their mouth is and this is usually a large amount of money because these are large cap stocks. Yeah, what I love about this is it's, it's like a, like seeing a chart, it's actually you're seeing the broad lines of a story and the news is actually extracting meaning from that and sharing in whatever way they want to. Correct.

The actual story is here. If you can read this, you will understand what’s happening. It's interesting right? It is a story, stop watching news, read this chart.

The real story is written here. Okay, before we see an example, we have an opposite case too, this is bullish. We expect the market to continue up, the opposite of this is the bearish engulfing pattern.

So this is bullish. Let's see a bearish, sorry, horrible handwriting, but let's see an example. This is what it looks like. So you have a green candle.

This time it’s just the opposite, right. The market opens, rises higher the previous day. Why don’t you explain this to me Tanmay. So, the previous day or week, markets opened here and closed here.

Yeah. Right. Next day markets opened here, and then everybody sold, sold, sold all the way. In fact, till the bottom and then a little demand was created and it closed here. Yeah. And this just shows that the entire buying of the previous day was engulfed by this day and this is called the bearish engulfing pattern.

So, the people who earned profit the previous day, were fed up. Totally right. You know what's interesting is? The problem with these patterns is, they come up randomly, so you need a higher timeframe. It doesn't work for daily, hourly timeframe.

Weekly chart makes more sense. That's one thing. The second is, in context of a trend, this makes sense, so if we have an uptrend and this comes, then it's very powerful. If we have a downtrend and this comes, then yeah, it’s very powerful. Like don't do the opposite. Markets are going up and then you're looking at this, it won't work.

So, when people trade, they often trade based on their guts, right? But when you combine reading trends with the candlesticks, you get more of an idea of where you think it might go. For example, if there’s an upward trend and then a bearish engulfing pattern appears, right, if this is red, then it will start trading slightly sideways. And if there’s a downward trend, and then you see a bullish engulfing pattern, it means that from this point it might go sideways or start an uptrend. Right, so engulfing pattern gives you a sign of where the price movement might go. Correct. Makes sense.

So, you're analyzing the demand and supply right now, so you're not really analyzing the past, right. It's something that's happening at the moment and you're analyzing the now you're in the flow, like they say, and you're reacting to price. So when people open trading view and are seeing what’s happening, we can see an engulfing pattern here, then they draw a line and say, see here’s an upward trend looking at the candlesticks. This is all they're literally reading the data that, correct, we’re learning about right. Correct, and remember the context here is we're learning the tools using which we'll make a system in the future. Got it.

So you're not analyzing randomly, but at least now you know what is happening in the chart. So, when you make a system, how do you connect that to a bearish and a bullish engulfing pattern? Yeah, so yeah, good question. You can be like, okay when there’s uptrend, every time there is a bullish engulfing, I will buy. This can be your theory. Got it. Right, and then you backtest it, it probably won't work, and then you repeat, repeat, repeat.

I mean, you have to test it right. Prateek is like, do this you can earn money, but if you backtest, you probably won’t. But we’ll explain more of that, we’ll get to it. So Tanmay, see this example, let’s leave the drawings, real stocks, real data. Yeah. Let's see if this worked. Okay, so let's see this example.

This is Reliance. This is Reliance’s daily chart. You can see market went down a bit, then it rallied.

This is our first candle in the right. Yeah, I saw it, I saw bullish engulfing. No, see this. This is bearish engulfing. We have a bearish engulfing here but here, you're actually right, that's a bullish engulfing right there also, yeah, totally right actually.

Like I can see a bullish engulfing here. Absolutely, and then this is bearish. Yeah, absolutely. And if we remove this we see what happened next and just look at that.

So in this case, it worked really clearly because the rally was canceled out with a lot of selling. Again, the market will be like, the news will be like, Reliance went high and slightly lower today, but people don't realize it is so much of selling pressure, and that just continued. So that's interesting. Now, actually, since we're here, one question Tanmay. Is this an engulfing, this red bar and a green bar, so what you gonna think? So, opening price was here, then it went down all the way here, next day when the markets opened, it gapped up.

Correct. And then it came here. So this can, it’s not an engulfing. It's not an engulfing, like it didn't rise dramatically higher than the opening price on the previous day or week. Yeah.

What you want is like over here, the opening and closing completely engulfed the previous day's body, here it's like almost same-same. Correct. So if you're doubting it here, I'm not sure it's probably not it. It should be damn obvious. So, now, what information would you believe? Would you believe fundamental analysis that happened three months ago, unless you're really smart, dude I feel this will happen in 6 months, or would you say okay, the news is decoding an event for me, or would you say okay price is giving me demand and supply on a worldwide scale here. So that's what we say the only source of truth is probably price.

Let see long term investor in ITC, and you want to hold this for 10 years. But on a monthly chart, you notice that you know, there is a, like the swing lows have broken and that trend is downtrend. Correct. At that point you can temporarily exit. Exit and buy the dip when it when it goes back. Yeah either double down on it later because you're a fundamental investor, correct, because you know supply will definitely bounce back.

You can double down or you can exit and re-enter at a lower price, so you can make these small tweaks, even if you're a fundamental investor, even they would make tweaks based on demand and supply. There’s nothing wrong in that. Fundamental investor can look at charts and better their long-term profit making. Correct. And people show data also right, like if you were, if you got in on all the days that the market dipped in the long term, you can make almost, you know 200%, 300% more correct returns, and there’s the compounding effect too. If you keep buying the dip over the long term it's like you've got the best price of this stock by constantly re-investing in deploying money at the right time.

Yeah, I think the smart thing is right, that you're not on the technical analysis camp or the fundamental, you learn both, and you use both to your advantage. You want to earn money, right? Do both, right. So learn that learn this, bring them together. I think it's Bruce Lee right, who said that, I want to learn how to defend myself, so I'll create my own Jeet Kune Do by bringing all the martial artists’ styles together, and I'll be like water, etc. So why do you want to be like, I just believe in technical, so do both.

It's like a mixture of patience and greed, balance, intermingling, let’s do this but let’s earn more money, too. Yeah, so that's it. It's interesting you just said this because this is something that happened with me.

2020 pandemic happened and the markets crashed. So if you see the market, they were going like this, this this, and all of sudden all crashed. And at this point, I was like, I am not longer investing money because I am really scared because none of the companies were open, it was lockdown, none of these companies are going to make money in the foreseeable short term future.

Yeah. Why would I put money into the market right now when I know that these companies aren't doing well. And the news was horrible. And the news was horrible right, but what I didn't know at that time was to read candlesticks, I was to read charts because if I had read them, I would just start seeing engulfing pattern at some point here, and I would start seeing that the markets are gonna rally and then they came right back up all the way until we are here now. I reentered here. Right.

I missed this whole time, where I was too scared, but if I had known how to read the chart, I would know where I should enter, there's just a long bullish run that, that's going to happen. I mean, I think at this point you would have also seen, like the trends part that we talked, here are lower highs, sorry, higher lows, higher lows, and it seems like there is demand. Correct, and you would have just entered. A little earlier. Earlier, I would have entered earlier and I would have bought more here, I would have bought more here. You know, I would have deployed my money accordingly. I lost lakhs.

But again, what you just said, we can actually turn into an investing system. Correct, again I'll go back to that right. Correct. And the reason why we have a system right you have a checklist that you follow, because there's so much of distraction, right like the news will say it's bad, your friends will say it’s not right, like you got to stop listening to that and just be like, Okay, follow the data. A system feels like the benefits of investor, long term investor thinking, meeting the greed of, you know, trader like having a system insulates you from the risk of being, you know, just a discretionary trader.

Yeah. And gives you, gives you the mentality of, you know, long term investor type. Correct, so you get the discipline too. Got it understood.

Tanmay, quiz time? Alright. Feeling confident? I feeling good, if I get all, all of them right. Yes, if I do well, I’ll get all LearnApp's paid course for free. Okay done. You haven’t got it yet? Did we charge you? So explain to me, what is technical analysis so everyone understands what exactly is it.

Technical analysis is the reading of price movement through the use of candlesticks and understanding patterns and trends and patterns, and patterns and trends, to gauge demand and supply. To gauge demand and supply. That's it. Correct. Perfect. Okay, another thing is we started with a line chart, then we moved to candlestick chart.

Correct. So why is the candlestick chart better? A candlestick chart tells you exactly how much demand and supply, there was on that day or that week and how much and how the demand supplied change. A line chart only tells you what the price was at the closing of the day, whereas a candlestick chart tells you how much it moved even during that day or week. Perfect, excellent.

Okay, this one you like, let’s recap candlestick patterns. Just explain what is hammer and then we'll go to the next, the next pattern. So a hammer stick, usually represents an increase in the demand of that price, so hammer, let's take this for example I'd like it opened at this price and it closed at this price, and then, the lowest of that day, it went really, really low, which forms the hammer stick, and then all of a sudden demand surges up and it closes, much, much higher than the lowest point. So it looks like a hammer, it usually shows that demand went really low and then it surged after that.

And you see this in context of what kind of trend normally? A bearish trend. Correct. During a bearish trend when the demand is very low and then it surges up, hammer stick pattern is formed. And does it work all the time? It doesn't work all the time. Cool.

Excellent. Got it. Give me a summary of the next engulfing pattern, bullish? Bullish engulfing pattern is when in one day or one week, the price of the stock moved lower, but in the next day or week, the stock moved higher enough that it engulfed the previous day's lows as well.

The previous day's body, the previous day's body. Correct. Some people also say, the whole candle must be engulfed, but those are details we can talk about later. Basically, it encapsulates the entire previous day's body. Alright.

Got it. I think that's done, that sounds good. Yep, cool, where's my free course? Where's it? All right, cool, awesome, I’m Harshad Mehta too.

No, that’s scam. We’re doing analysis. So, this was great right, because now I can look at a chart and understand what to do but what will be even amazing is if I could understand as well as predict using charts, like what’s gonna happen next, etc. If I can be more accurate with my predictions.

So I want to start learning that like, how can I how can I do that? Okay so that's interesting so what we did was we zoomed in and we looked at one candle to candle, maybe we can zoom out a little bit and we'll generally, see what happens generally. We saw supply and demand on a candle level. Correct. Let's do supply and demand on a market level.

We'll just zoom out a little bit cool and we'll see multiple candles multiple months and where can supply and demand exist. Correct, that'd be interesting. Yeah, that'd be good. Let's do that, let's do. Yeah.6

All right, that's it for this episode make sure you check out LearnApp, where you can take more courses on the basics of trading, technical analysis, strategies all way to building your own trading system. Check out LearnApp using the link in the description and get two months, extra access, absolutely free, and while you trade you will need to analyze your stock fundamentals and their history in depth, you can do that thanks to Ticker Tape. And before you begin trading one must have a D-mat accoun, so open your own D-mat account with the link in the pinned comments. See you in the next episode, ohh next one, next one, just click on the next one. Coming up next, the first player, the trader who wanted to buy would be like, dude we got this opportunity two times, and I couldn't buy, so far we looked at single candlesticks, yes, let's now zoom out and look at a bunch of candlesticks, Hindi that's why it says zoom out to support and resistance.

People start buying and what happens, it goes up prices go up. Now this area is generally referred to as support. Right, this area, so a support is drawn on two points. Okay, so you have falls, bounces from the second point, now you have those two points, then you can draw your support, Got it.

Awesome, so that's good actually. That's nice, right, this looks good on camera, I'm sure. It's only us geeks finding this beautiful little bit that's true. We look too beautiful Okay let's not get So you are Picasso of national stock exchange.

Thanks man...

2021-06-11 14:32

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