Stock chart reading: six steps and two setups explained
Felix Nikolas Prehn walks through candlestick patterns, volume confirmation and the 50-day moving average as a practical trading framework.
Felix Nikolas Prehn, economist and former investment banker
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Stock chart reading need not be complicated, according to Felix Nikolas Prehn, an economist and former investment banker. In this episode he outlines a six-step approach built on daily candlestick charts, explaining how the size and colour of candles reveal the strength of a trend. He then introduces volume as a confirmation tool, showing that rising volume alongside growing green candles signals continued upward momentum. The second core element is the 50-day moving average: when price sits above the line the outlook is bullish, and when it crosses below, a sell signal may follow. Prehn illustrates both directions using S&P 500 data from 2022 to 2023 and walks through a recent trade that returned roughly 10 per cent in five days. He stresses waiting for a confirmation candle before acting on any single-day move.
In this episode
- Introduction to the six-step chart reading approach
- Choosing the daily time frame for candlestick charts
- How green and red candles show open, close, high and low
- Reading candle size and volume to gauge trend strength
- The 50-day moving average as a bullish or bearish signal
- Using the 50-day line as a sell signal in a declining market
- Live trade example returning roughly 10 per cent in five days
- Combining candle size, volume and the moving average in practice
Transcript
Reading stock charts is the secret to how this setup here made me 10% in the last 5 days, yet everybody is making chart analysis incredibly complicated. Maybe because they think it's complicated, or maybe because they don't really understand it, or they want to make themselves look smarter. Well, I used to be an investment banker, so I know how limited my brain capacity therefore must be. So let me walk you through the basic 6 steps and then the only 2 setups you need to know to actually make money from looking at charts. Let's get cracking.
You can download the full lesson, all explained to you including the screenshots, completely for free. Go on the link down below, I'll put it on the screen, I'll put it in the description as the first link. Get your hands on there, it's completely free of charge, it's inside of our private Facebook group.
Now the first thing you need to understand is time frames with charts. So with stock charts you can select daily, weekly, minute, 3 minutes, all that kind of stuff. Really as a normal human being you just want to be looking at a day chart. You're going to find a D for day inside TradingView.com or any other charting software that you use inside your brokerage. That means that every single day on the chart is simply one day, Monday, Tuesday, Wednesday, Thursday and so on. So one day is represented by one candle.
Get a little bit further into this. What does the candles actually mean? This is a fantastic summary of it. Got green candles, that means the market went up. You got red candles, that means the market went down. With me so far?
All right, so on a green candle you open at the bottom end of the candle and you close at the top fat bit of the candle. Now some candles then have a wick or a shadow, or as I like to call it a cat's tail, either one that's relaxed and hanging down or one that's a little angry to the top side. Those are the high and low points of the day's trading range. So you opened here, you closed there, and you messed around a little bit above and below it during the day.
Now for a red candle the story is exactly the same thing but it's slightly upside down. You open at the fat part of the red candle, you close at the fat part of the bottom end of the candle, and then you got these tails. Those are basically the parts of the day where they consumed, and they're just telling you we moved somewhere between this range and that range, but really this is where we closed. So we opened here and we closed there.
Now you know what candles are, and therefore they tell you a little bit more than is apparent at first glance. What do you make of these candles? Imagine you were looking at a chart just with 3 candles and you got 3 green candles in a row. Good, bad, very good. What are you thinking?
Well there are 2 things you want to look at. One is actually the size of the candle. Very little candle, medium-sized candle, very very tall candle. And as from 1 to 3 they keep getting bigger, it means each day we're going up more than the previous day, so the rally is getting stronger.
Now there is a second thing you can look at to confirm that, and that is at the bottom of every chart you will find volume. And volume in this case is moving up as the stock candles are also moving up at the top. That means more and more people are jumping in on this trade, more and more people are feeling bullish, and therefore you're likely to keep going up.
Do you want to see what happened after these 3 candles? Well let me show you. This is what happened after the 3 candles. Just so we showed you these 3 here, and each day bigger, taller candle, strong strong volume at the bottom. There you go, 1, 2, 3, and it really really kicked off a very very very nice uptrend here on the S&P. So that's one thing to look for, size of the candle compared to the previous day, and does the volume support it. In this case yes, so it's a good thing.
Now the second secret sauce, and that's literally all there is to it, is the 50-day moving average. You can again add this on any stock chart out there, go to TradingView.com, they'll do it for you. I'm not selling it by the way, it's free of charge. And what does it do? Well it basically tells you what's the average movement, and when you are above the average movement you are bullish, the stock's going up more than normal. If you're below it you're feeling a little bit glum about the stock. That's the way I look at it.
So here is a screenshot of the S&P 500, 2022 to 2023, and in blue you've got the 50-day moving average. You can see we spent most of the year above it because we kept going up, but we had these moments where we touched it. Each of these moments were actually glorious buy opportunities as indicated here by the arrows. Here's another one.
That's a really really simple way, and I use this to make money. The trade I'm going to show you above, I'll show you the full screen in a second, that made me 10% in the last week, one trade took me 3 minutes to set up. Very very nice, is exactly based on this philosophy. It's not a philosophy that I invented, no, but I was taught it by bankers who were taught it by bankers who were taught it by bankers, and every trader in the world basically looks at this.
Now does it work in the other direction? Yeah of course it does. This is again in blue here, let me use a blue pen so it's a little bit more clear for you. In blue you've got the 50-day moving average, and here you have a period where we're declining in 2022. So you're going up here with your candles getting taller and taller and taller for a couple of days in a row. You break through the 50-day moving average line here, so that's a real bullish buy signal as indicated by that green arrow.
So as we break through the 50-day moving average line it can become a buy or sell signal, and that's lovely. Then we come back down again on the other side, and here you get a nice big fat juicy red candle. You break below the 50-day moving average line and then all hell breaks loose and you keep going down and down and down and down. Then yeah you do get a bit of a recovery here, and what happens at the top here? Well again you get a really big fat red candle, and then that again would be your sell signal to get out of.
So look for the size of candles for clear signals, and are you above or below the 50-day moving average line. That's essentially all there is to it. And then look to your volume at the bottom. So for the example up here where we get that big fat red candle, can you see how down below the volume shot up, and therefore your sell signal was confirmed by strong volume, big candle, and therefore sell.
So let me show you the trade I've got here open. This is literally something I set up last week, I did a live with my community. And what did we do? Well we saw one big red candle here, that was bearish, and you might have thought should we all sell and freak out. But I tend to wait for the second day, I call it the confirmation candle. Is the trend actually there or was this a blip, because there are lots of blips.
So we got a nice big green candle the second day, and that candle was actually green because we closed above the red one. Then the following day we got another massive long green candle, which would have been the real confirmation if you were particularly cautious. Down here we've got volume which is pretty good, look at these 2 green days, the volume is higher than it usually is on other days. Therefore again it makes us feel more bullish, and then this thing just keeps going up and up and up and up.
We're still in the trade and we're up $500 on this or something like that. My trades are always small but I do lots of them, and it's about 10% on the trade and we're going to keep running with this. You might be wondering but what about the 50-day moving average line? Well it's the yellow line I've got in here, so we're above it which means already quite bullish as a setup. But we look at the size of the candles, we look at the volume supporting us, and we call it. It's actually really very very simple.
I will put the link down below to a complete document that walks you through the screenshots and explanation, so you can go through this again and again and again and play around with this with your charting software. I'll put a link to a charting software that I use as well. Ask me your questions if you have any questions, join me in the Facebook group where you'll get to when you download this document, and you can ask me questions on this or anything else. Be delighted to help you out.
Our mission here is very simple, we want to make a million people financially free. It's a tall order but we're getting there, we've got about 9,000 students so far and counting. It's a tremendously fun thing for me to do and I hope for you as well. So let's make this your best year yet.