Boy, what a week!
The market just keeps heating up, and our list of potential plays continues to grow…
We have entered what I’m calling, “The Golden Age of Trading Opportunity!”
And there are so many patterns…
One I keep seeing over and over again is the Red Candle Theory (RCT), and if you’re not familiar with it, I want you to get to know it.
It’s one of my favorites because it’s simple, easy to learn, and a very powerful strategy for day traders.
In an insane market like this, you need to have setups like RCT down cold so you’re ready to go once the trading day starts.
Table of Contents
What is the Red Candle Theory (RCT)?
RCT is a pattern I’ve relied on for over a decade, especially when dealing with low-priced, low-float stocks that spike on news.
It helps traders avoid the common mistake of chasing vertical moves and instead wait for a controlled setup with strong risk/reward potential.
How to Trade the RCT Setup
Here’s the process in a nutshell:
- Find the 5-minute red candle:
You want a stock that’s spiking, usually on a news catalyst. These moves are most common in low-float stocks that can rip higher quickly.
Once the stock spikes, wait for that first five-minute red candle to form.
2. Mark your entry and stop-loss levels:
The top of the red candle is your entry point, and the bottom of the candle is your stop-loss level.
3. Set a target using a 3-to-1 risk/reward ratio:
This way you’re only taking trades with great potential returns.
4. Wait for breakout confirmation:
Once the stock breaks above the high of the red candle, you’ve got the green light to enter.
Why I Love the RCT
It forces you to be patient:
Instead of chasing the spike, you wait for the stock to confirm that the trade has a high probability of success.
It gives you structure:
You’re not guessing where to enter or exit. The chart lays out a clear plan for you.
It’s rooted in momentum:
Stocks that go vertical often have strong momentum, and RCT helps you capitalize on that second leg up.
Two Real-World Examples From Yesterday
Yesterday was a great teaching day for RCT…
We had two low-float spikers, and by applying the RCT we found a winner in one…
And knew to avoid the other.
First up was Kazia Therapeutics Limited ADR (NASDAQ: KZIA).
The stock kept spiking but no red candle ever appeared. Using the rules of RCT, we wouldn’t have bought the stock…
In the end, KZIA topped out and quickly tumbled, leaving tons of bag holders in the dust.
The lesson here?
If we had a red candle, we would have known where to set our stop loss and get out of the trade before it was too late.
KZIA Intraday, 5-Minute Candles Chart; SteadyTrade
Next was Alpha Modus Holdings Inc. (NASDAQ: AMOD).
It spiked as well and by using RCT, we waited.
In this case, a red candle did appear, telling us where to enter the trade and where to set our stop loss.
In this case, we used $2.91 as our entry. Within 5 minutes AMOD climbed to $3.45 for a gain of 19%*.
AMOD Intraday, 5-Minute Candles Chart; SteadyTrade
To start using the RCT strategy, you need a great trading platform that includes real-time data, charting, technical indicators, and more.
My top pick, and the one I use every day, is StocksToTrade.
It features everything mentioned above…PLUS, right now, you can get two weeks of both the STT platform and our Breaking News Chat service for $17.
Grab your 14-day StocksToTrade + Breaking News Chat trial today for only $17!
My Final Thoughts…
The biggest challenge traders face is knowing when to enter a trade.
The RCT setup hands you that information.
It also helps you stay patient, plan your trade, and execute it with a clear risk management plan in place.
Remember, no pattern is foolproof.
What matters is sticking to your plan and cutting losses quickly when the trade goes against you.
So next time you see a stock going vertical, don’t chase it. Let it breathe, wait for the red candle, and follow the chart’s lead.
For more trading strategies and mentoring, subscribe to my StocksToTrade Advisory service today.
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Sign up for StocksToTrade Advisory right here!
Have a great weekend, everyone. See you back here on Monday.
Tim Bohen
Lead Trainer, StocksToTrade