Video Transcript:
All right, good morning. This is David from Trader Dale, and today I am going to go over a trade that we took yesterday. I am mainly going to focus on how we developed the bias for that trade rather than the actual execution.
The bias is going to be based on Candle Range Theory, candle science, or whatever it is called these days. It is the analysis of candles on higher timeframes and using them together to create a bias.
Every candle on this screen, regardless of the timeframe, is going to tell you a story. Every candle has a body and a wick on both the upside and the downside. How long those bodies are, what color the bodies are, whether they are bullish or bearish, and how long the wicks are on each side all come into play and give you an idea of where price action is.
Candle Range Theory is based on one simple concept: every single candle is a range. Let’s take this long black candle because that is the one we are going to use. Above the high and below the low of that range, there is liquidity. These are also areas where market makers will search for higher or lower prices and attempt price discovery.
The theory is that if price fails to discover new prices below the range and then returns inside it, price will typically target the other side of the range. It is very simple.
One of the issues that plagues this type of theory, especially in what you see on YouTube and how people teach it, is that although the concept is very sound, you need to use it with point-of-interest context.
Your CRT model needs to deliver from a key area, such as a high-volume area identified with Volume Profile, a key pivot high or low on a longer-term four-hour or daily chart, or a higher-timeframe Fair Value Gap on the one-hour, four-hour, daily, or possibly weekly chart. Yesterday’s setup actually came from a monthly Fair Value Gap.
If the pattern is not delivering from a key area and these patterns are not occurring at important reversal points, then they do not mean anything. You are simply trading patterns.
Let’s go through yesterday’s progression. I have the Nasdaq charts from yesterday displayed here. I have a 15-minute chart, a 30-minute chart, and a one-hour chart.
We generally use the 15-minute CRT model only during the first 30 to 45 minutes of the market, when things are moving quickly. This is when the market is developing liquidity on both sides, including during the premarket, and these 15-minute models can be very valuable.
However, when you have a large market move that continues past 10:00 or 10:15 and produces a large candle like this one, we want to look more closely at the 30-minute and one-hour charts to establish our bias.
Let me show you. It is not displayed down here, so I will place a line on the chart. We had a key area that price tapped into. It was a Point of Control and a very high-volume area from a previous move higher. We also dipped into a monthly Fair Value Gap and tapped this POC. This was a prime area for price to reverse from. I do not remember the exact value, but it was approximately around this area.
When the market is making a huge move downward, we are not normally looking for 15-minute CRT models. However, the early part of the reversal and the bottoming process can sometimes begin on the 15-minute chart.
If you look at yesterday’s price action between 10:15 and 10:30, price swept the low of this candle and then closed very strongly. This showed a potential bottoming pattern and indicated that price was likely to trade toward the top of the previous 15-minute candle.
We were not going to act on that signal immediately. You could have, and it actually would have worked, but because of the severity of the move, we wanted to wait longer.
We then moved to the 30-minute chart. Fifteen minutes later, the 30-minute candle closed. Actually, the 30-minute and 15-minute candles both closed at the same time at 10:30, and both created CRT models.
The 15-minute model was here, while the 30-minute CRT model targeted the level all the way up here at the high of this candle.
The plan was now to look for a retracement during the next candle and use a shorter-term entry to trade toward that target. We now had a bullish bias, a target, and an area in which to look for an entry.
However, this 30-minute candle left behind a huge Fair Value Gap. When this happens, I typically want more confirmation from the one-hour chart. If there had been no Fair Value Gap and we had a clean path toward that high, I would have been all over this setup.
Half an hour later, the one-hour candle finally closed at 11:00 and also created a CRT model. The 15-minute chart had already confirmed that the market was potentially bottoming, the 30-minute chart doubled that confirmation, and the one-hour chart provided the strongest confirmation.
We were now looking at a one-hour CRT model with two targets. We had the 30-minute candle high up there, and we also had our main target at the one-hour candle high.
When the one-hour candle beginning at 11:00 started to form its lower wick, we already had our bias. We had a bullish bias and a clear narrative.
Where was price delivering from? It was delivering from a high-volume POC and a monthly Fair Value Gap. Did we have a target? Yes. The only thing we needed now was an execution model.
What typically happens during these one-hour candles is that price dips and creates the wick. It accumulates, manipulates, and then distributes on the one-minute chart. That is where you look for an entry.
You would move your stop loss to breakeven once price started crossing the previous high. You would then target the 30-minute candle high, followed by the one-hour candle high.
This is a Candle Range Theory methodology, but it is based on price delivering from a higher-timeframe Point of Control. Because yesterday’s opening move was so large, we used a combination of the 30-minute and one-hour CRT models to trade toward our target.
It is all based on the severity of the move and how much Fair Value remains on the chart. If there is no Fair Value left behind, you can execute on shorter timeframes.
The 15-minute model is generally going to be more active and more useful during the first 15 to 20 minutes of trading, or perhaps during the first half hour. After that, the 30-minute and one-hour models begin to play a larger role.
Start looking for these patterns, using them, and backtesting them. They are very easy to backtest. Go through the one-hour and 30-minute charts and look for these models to form during the New York session, generally between 9:00 a.m. and midday. After 12:00 p.m., everything tends to become a little choppier.
This is how we create an intraday bias based on high-volume Points of Control and the important points of interest that we identify. We then combine that bias with our entry models.
Remember, to have a complete trade, you need a bias. Where is price going? You also need a narrative. When is price going to get there, and where is it delivering from? You then need a target and an entry model.
There are four pieces to every trade. The CRT model helps us establish our bias from predetermined levels of interest that we have already identified on the higher-timeframe charts.
Hey everyone, it’s Dale here. I hope you enjoyed the video. If you would like to trade alongside me and our team of prop-firm-funded traders every day, click the link below the video and hop aboard. We look forward to trading with you.
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