How To Trade the RCT Pattern: Pitfalls

Are there common pitfalls when it comes to trading the RCT pattern?

No chart pattern works 100% of the time, including the RCT. It’s easy to see the parabolic move followed by a pullback on the chart. And that makes it easy to create a trade plan. But there are things to watch out for. Follow the 8 tips below to avoid common mistakes.

The Big Picture

If you haven’t read How to Trade the RCT Pattern, parts 1-4 you can find them here:

Part 1: Recognition

Part 2: Build a Structured Trade Plan

Part 3: Risk First, Profits Second

Part 4: How the RCT Pattern Helps New Traders

Now let’s focus on common pitfalls and turn them around to refine your RCT trade process.

Look for a +50% Move

I like to see a +50% move before the red candle. That gets eyes on the stock. More eyes means a better chance for a continuation.

Focus on premarket RCTs First

My favorite time to spot the RCT is between 7-9 a.m. when premarket trading is in full swing. I’ve shown after-hours examples in this series, too. But I’d start with premarket RCTs until you gain confidence.

Day Trade It, Don’t Swing It

The RCT pattern typically plays out in minutes. Hours at most. I’m not a fan of sitting around waiting for a stock to do something. So for me, I would avoid or get out if it goes sideways for too long.

Follow the Criteria

Remember, we’re looking for:

• A parabolic move before the stock pulls back to form a red candle (+50% or more is ideal)
• Low float
• Unusual volume compared to the daily average
• News – the more legit the better

Let’s add one more to refine your trading process: former runners work best for RCT setups. I tend to avoid stocks that haven’t run before.

Use the 5-minute Candle

I look at other time frames but not for the RCT pattern. With the RCT, it’s only the 5-minute.

Ignore the Wicks

With the RCT pattern, we work off of the body of the red candle, not the wicks. The 5-minute red candle can chop around all it wants. We’re going to focus only on the open and close prices.

Focus on Low-Priced Stocks

The RCT pattern is mostly a small-cap, low-priced stock pattern. It typically works best for stocks trading below $10 a share.

Don’t Get Greedy

I’ve shown examples where you could have made anything from 2:1 to 10:1 reward-to-risk. Typically, I like to target 3:1. It allows you to scale out if the trade is a winner. You can sell half at 3:1, move your stop up to your entry, and let the pattern play out. Worst case scenario, you leave the trade with small profits.

My Take

The RCT pattern is one of the most straightforward, simple, and predictable trading setups. It allows you to trade like a real trader, with a structured trade plan, without playing guessing games.

Watchlist

Let’s look at a failed RCT. They don’t all work, but with the RCT you have a clear risk level.

On Friday (May 8) Traws Pharma Inc. (NASDAQ: TRAW) gapped and ran from $1.70 to $2.58 on hantavirus news.

After TRAW set the RCT, it failed within 15 minutes. If you’d bought, you would have been stopped out. As long as you followed the plan set by the RCT, you would have lost only 5 cents a share.

On My Radar

• So much for the orange suits: crypto’s gone corporate.
• SpaceX to spend up to $119 billion on its Terafab chip facility, which will manufacture chips for SpaceX, xAI, and Tesla.
• Britain’s oldest bank values quality over quantity. A lesson more day traders could stand to learn.
• Bullish: the Bureau of Labor Statistics April jobs report.