How to Day Trade for a Living: Tools, Tactics, Money Management, Discipline and Trading Psychology

On the other hand, bearish candles are any candles that show a bearish body. So what does the bearish candle tell you? It tells you that the sellers are in control of the price action in the market and that buying, or a “long” position, would not be a great idea.

Filled candles that have a big filled body, such as in Figures 6.4 and 6.5 below, mean that the open was at a high and the close was at a low. This is a good indicator of a bearishness in the market.

Figure 6.4 - Bearish candles.

Just by learning to read candlesticks, you will begin to generate an opinion on the general attitude for a stock. Again, this is called the “price action ”. Understanding who is in control of the price is an extremely important skill in day trading. As I mentioned, a successful trader really is a social psychologist armed with a computer and trading software. Day trading truly is the study of mass psychology.

To summarize this section: your job as a successful day trader is to figure out if the sellers will end up in control or if the buyers will end up in control. Back in Chapter 2, I used the example of a sandbox in a schoolyard. You don’t want to be off in the sandbox doing your own thing. If you are, you’re in the wrong place. If the buyers are strong, you want to be buying and holding. If the sellers are strong, you want to be selling or selling short. You definitely do not want to be off in the sandbox doing your own thing. You want to be where the action is. And if you can’t decide what that action is, if it looks like it’s a toss-up, don’t do anything. Bide your time or move on to look for another potential trade. Never forget that the successful day trader is just like a guerrilla soldier, you make calculated moves, at the appropriate time, quickly and stealthily.

Stand aside if you cannot recognize who is winning the battle. Let the bulls and the bears fight with each other and then enter trades only when you are reasonably certain which side is likely to win.

You never want to be on the wrong side of the trade. It is important therefore to learn both how to read candlesticks and how to constantly interpret the price action while you are trading.