Today, let’s talk about one of my favorite day trading patterns.
There’s a good reason I’m bringing it up since we had the perfect setup yesterday morning premarket.
I mentioned it during my Premarket Prep, of course, where we could see the whole thing in real time…
And then I was so excited about it that I did an early broadcast of my Market Minutes just so I could get the news out there to all of my subscribers.
If you don’t know about it, Market Minutes is one of three weekly broadcasts I do for my StockstoTrade Advisory Service.
With STA you get those three weekly videos plus access to all of my watchlists.
Learn more StockstoTrade Advisory here.
So, yesterday morning, I was really hyped about SINTX Technologies Inc. (NASDAQ: SINT) because it was clearly showing a pattern that predicts potential big winners.
Yesterday morning, around 8 am, premarket, I saw SINT exhibiting the Red Candle Theory pattern. I call it RCT for short, so when you hear me mention RCT, which I do a lot, that’s what I mean.
RCT is something we use when we see straight vertical stocks like SINT yesterday.
And this happens a lot to low-priced, low-float stocks like SINT.
News drops, like it did for SINT, and the stock spikes.
Now your first thought might be to just jump in headfirst and to catch a further run. I get it. It’s very tempting…But that’s not what you should do.
This is where RCT comes into play.
If you look closely at the SINT chart, right around 8:15 to 8:20 a.m., it put out a red five-minute candle.
But it’s more than just a red candle, it’s a high and tight candle, which is what we always look for.
See, not all red candles are created equal. What you want to see is the stock staying near its highs during the pullback. This shows that buyers are still holding strong, and the stock hasn’t lost momentum.
On the other hand, If the pullback goes too deep, it’s a sign of weakness, and you may want to pass on the trade.
Right at 8:15, during Premarket Prep, I pointed out that SINT was trying to put in an RCT.
And sure enough, five minutes later, there it was. The five-minute red candle forms between 8:15 and 8:20. And when that happens, you have a trading plan.
Here’s how it works:
The top of that red five-minute candle becomes your entry point, and the bottom is your stop loss.
Then, we use our standard 3-to-1 risk/reward methodology for the target price.
SINT broke out of the red candle range and eventually topped out at $6.97 per share. That’s a 21.22% return* in under two hours!
SINT Chart 2-Day, 5-Minute Candles Chart; SteadyTrade
I love the RCT setup because it’s been consistently reliable for over a decade.
That doesn’t mean it works every single time — no stock play works every single time — but it’s worked enough that I’ve been trading and teaching it for years.
The beauty of this pattern is that it allows you to slow down, wait for it to set up, and let the chart write the trade plan for you, with a clear entry, stop loss and exit.
As traders, one of the biggest challenges we face is knowing when to enter a trade…
But RCT gives you structure in an otherwise chaotic market. It helps you stay patient, wait for the right moment, and set up a trade with excellent risk/reward.
How to Spot the RCT Setup
Here’s the step-by-step process for identifying a Red Candle Theory setup:
- Look for a vertical move: The stock needs to go vertical first. This could happen in pre-market, right after the market opens, or when news drops. You want to see that big, impulsive move, usually in a low-float stock that’s getting attention.
- Wait for the first red candle: Now comes the hard part—waiting. Instead of chasing the move, you sit tight and wait for that first red candle to appear on a five-minute chart. This signals that the stock is starting to consolidate after the initial spike.
- Check for high and tight consolidation: You want to see if the stock stays near its highs during the pullback. If the pullback goes too deep, you probably want to pass on this one.
- Plan Your Trade: Once you have that high and tight red candle, you can build your trade plan. The top of the red candle is your entry price, and the bottom of the red candle is your stop loss level.
- Watch for Breakout Confirmation: After you’ve planned your trade, wait for confirmation—a breakout above the high of the red candle. When the stock breaks above that level, you can enter the trade confidently, knowing you’re using a setup that has worked time and time again.
Why Red Candle Theory Works
So, why does this pattern work so well?
First, it forces you to slow down. One of the biggest mistakes traders make is jumping into a trade too early.
By waiting for that red candle, you avoid the FOMO trap and give yourself time to assess the situation. You’re not chasing a return.
Because the RCT setup gives you a clear entry price, a stop loss level and a proven risk/reward method, it inherently contains a good risk management plan.
By the way, every trader needs to understand how to manage his or her risk. Learn more about it in my article here.
Finally, it’s all about momentum and timing. Stocks that go vertical often have strong momentum behind them, but they need time to cool off before continuing higher.
RCT allows you to catch that second move, rather than getting in when the stock is more vulnerable to a pullback.
Tips for Trading RCT
- Be Patient: Don’t chase vertical moves. Let the first red candle form before jumping in. Patience pays off in trading.
- Stick to High and Tight Setups: If the red candle pulls back too much, it’s a sign of weakness. Focus on those high and tight consolidations where the stock holds near its highs.
- Use a 5-Minute Chart: RCT works best on a five-minute chart because it gives you enough detail without being too noisy.
- Set Your Stop and Target: Once you’ve identified your entry and stop loss based on the red candle, stick to a 3-to-1 risk/reward ratio for your target.
To employ the RCT strategy, as well as all the others I use and teach to my subscribers, you’ll need a robust trading platform that allows for stock screening, setting alerts, applying technical indicators, paper trading, and more.
The one I use every day is StocksToTrade. It has everything traders like me look for in a platform.
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Remember, no pattern is foolproof. There will be times when RCT doesn’t work, and that’s okay.
What does matter is that you stay disciplined and cut your losses quickly when the stock moves against you. That’s how you build long-term success in trading.
So next time you see a stock going vertical, don’t chase it—let it breathe, wait for that red candle, and follow the chart’s lead.
Have a great day, everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade
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