3 Day Rule Full Explanation with David Moadel // Stocks Charts Three Waiting Trading Explained
hello and welcome to looking at the markets with David Modell I wanted to
explain in depth and detail the three trading day waiting rule which I talk
about a lot in my videos and before I get started if you want more help if you
want some assistance with putting together a trading or investing plan you
can email me email me for coaching at David Modell at gmail.com a lot of times
I will look at charts like this this is Disney stock the daily candlestick chart
from fin viscom each candle represents one day of price action and so this is
good for swing trading where you buy and hold for a few days maybe or a few weeks
something like that couple months so oftentimes I like to buy low with the
idea of hopefully selling higher and I'll see a stock go down a lot in one a
lot in one day like Disney stock had a big gap down and so hopefully you can
see this candle okay so this was a bad day okay a big down day for Disney stock
alright but I didn't buy here because of the three trading day waiting rule
because I figured after a big down day there's a decent chance that it might
keep going down over the next several days and that's exactly what happened
okay so what counts as a big down day well you could have a big gap down or
you could have a long red candle or a combination of the two like this candle
over here has a gap down and a medium-sized red candle and so the whole
thing is pretty big with the with the down day here's another example of that
exact same thing a gap down and a red candle adds up to a big down day
now this last candle here I know it looks like a big green one but really it
was a down day but just barely it was almost flat down point 33% which
is not very much so this is actually a pretty decent day compared to the last
four trading days alright so you can see that after waiting you know the bleeding
has subsided so to speak alright and this might actually be a good time to
start counting for the three trading day waiting rule and I will explain that now
so let's go to the top here the three trading day
waiting rule after a stock goes down a lot in one day
sometimes the stock will continue to go down during the next several trading
days like we saw after that big gap down with Disney stock the three trading day
waiting rule is designed to prevent swing traders from buying a stock or a
commodity currency cryptocurrency etc at the wrong time this rule is not perfect
and it does not work 100% of the time I will be talking about stocks here but
this rule can apply to other things like gold Forex Bitcoin etc so let's talk
about why do stocks sometimes keep falling after a big down day why does
this happen well there are a number of reasons but here are the two big ones
that I've noticed first not everybody watches the news every day and not
everybody watches their portfolio every day some investors won't notice that
their stock is down until a couple of days later and then they panic sell so
that's one reason that a stock might keep falling after a big down day
another reason is this for several days after a stock goes down a lot in one day
analysts and article writers will publish negative opinions about the
stock investors will read the opinions of these so-called experts and they'll
sell their stock shares so that's a couple of reasons why it might happen so
what does it look like on a chart well we just looked at Disney but I'd like to
explain it a little further on a candlestick chart with daily or one-day
candles you'll see a big gap down or a long red candle or sometimes both and
again you know that's what I'm talking about here big gap down long red candle
or sometimes a combination of gap down and red candle okay after and I call
those big down days after the big down day you might see a medium-sized down
day and then a small down day in other words the gap downs and red candles
might get smaller and smaller okay that's that's as the panic starts to
wear off in the markets the idea is to wait until the panic and the downward
momentum have subsided and the market is ready to bring the stock back up again
you probably don't want to catch you don't want to catch a
knife while it's still falling fast so here's a big question when do you start
counting the three days remember the rule only counts trading days when the
stock market is open don't include weekends and holidays when you're
counting the three days now this does not apply to things assets that trade
seven days a week like oil or gold silver currencies Bitcoin things like
that okay this is just for stocks when you see that first big down day that's
day zero it's not day one it's day zero all right so with Disney that first gap
down that would be day zero all right if the next day shows some improvement
meaning it's either green or flat or maybe slightly red but not too much
that's day one if the next day after that shows some more improvement that's
day two by the third day the the daily candle should at least be flat a green
candle would be even better you don't have to buy the stock here but you can
look at it more favorably and maybe consider it at least you're not catching
a falling knife now okay so I'm not telling you necessarily to buy after
three good days I'm just saying you don't even consider it until at least
three good days have happened now if at any point during the three days if at
any point during the three days you see a big down day the counting of days
starts over the big down day is day number zero and you're starting the
counting all over again alright so Disney is a perfect example
okay you have a big down day this is day zero another big down day so again we're
still at day zero another big down day still day zero another big down day
still at day zero okay here's a fairly decent day so I can actually count this
if this right here this is day zero and this one this one closed right about
here right about where it and so a pretty good day I would say not
bad all right again sometimes I wouldn't count this if I wasn't comfortable with
it but compared to the last few days this was a pretty darn good day all
right it was pretty much flat close to it so I
would count this last bad day here this this last red day here as day zero and
now this is day one I would count it as day one because it's a pretty good day
it's at least acceptable all right day zero the last bad day here and then day
one would be this flat day here that last candle okay and I'll show you some
more examples all right so what if and just to go back really quickly okay so
this is day one now if the next trading day it gets you know it's a big awful
day again big bad day then it would be right back day zero again because I
don't want to catch something while it's still falling fast okay but if we had a
couple more you know good days at least flat or better yet starting and curl
upwards then I might buy I might buy some shares or at least consider it
okay so if this is day one and the next day's good day two is good let's say it
you know goes up here and the next day day three starts to go up here then I
might buy I might buy at the close of that day or the open of the next day
okay because yeah oftentimes I will wait
until the end of the day to see how the candle finishes okay because it might
start high but then fall all day long okay you don't know if it's a good day
or bad day really until the end of the day all right so I hope that clarifies a
lot of it now what if after a big down day which is counted as day zero right
what if then the stock shoots up really fast during the next three days so let's
say if Disney okay so here's a if this is day zero and then this flat day is
day one what if in the next couple days it just goes up you know just huge green
candles alright so now you know goes all the way up to 140 or 150 let's say all
right though those would be really big green candles but yeah it could happen
let's say it went you know up a whole lot to the point where it's almost at
since here the resistance level at 152 152 153 something like that so yeah
let's say you start counting day zero during a big down day then during the
next three trading days there are giant green candle giant green daily
candlesticks so after three days the stock is now expensive I probably would
not buy the stock at that point because I usually don't buy stocks when they're
expensive however momentum traders might choose to
buy the stock at that point so it's really up to you depends on what kind of
trader you are if over the next three trading days let's say pretend Disney
just bounced up bounced up to like you know 150 where you know it's near the
resistance level here I wouldn't buy it because I would feel that now it's
short-term expensive but some people might a momentum type of trader might
might buy their buy at that point because they would feel that it's got
moment' strong momentum upwards that's cool if if that's your style my style is
more by low to try to sell higher so it depends on your style of trading yeah I
would prefer to see the stock go sideways or better yet curl up
moderately so I really like when it makes like a fishhook pattern after
starting to after the market calms down like it's starting to do here it looks
like I'd like to see kind of a fishhook kind of thing or at least sideways but
if it curls upward that's even better yeah so I prefer to see the stock go
sideways or better yet curl up moderately that way I might be able to
buy it while the price is still low but not while the stock is falling fast
and while traders are still panic selling so that's the idea and here's
another example with Twitter okay this is a daily candlestick chart from
Twitter and you can see a huge gap down and notice that remember how I talked
about how after a big down day oftentimes you'll see a medium down day
and then smaller and then smaller right and so that's what's going on here
all right but if you bought in at the right time you would have done quite
well as you can see it ended up ended up you know
way up here alright so let's take a close up look at that same chart alright
this is still the same Twitter chart just a close up okay so you have the big
gap down so that's so this candle is day zero what about the next day oh it's
still falling I'm not super comfortable with that it's a judgment call but I
don't like that I don't like this candle so I'm gonna stay out of it so this is
again day zero I'm not even starting an account yet
next day the candles are getting smaller still not flat enough for me
I might accept a really small red candle but I would still not yet still day zero
this one I'd be pretty comfortable with I mean that's that's almost flat so I'd
count this as day zero alright and that would count this is day one I know it's
red but it if you look closely hopefully you can see it it closed right about
where it opened it looks like it went up a little bit but then went down and
closed right near the open so if this is day zero I'm still pretty comfortable
with this I think this is sideways so this is day zero this is day one this is
day two again closing around you know pretty flat and this is day three so you
got three days of flat so now it's a judgment call you know some people
insist on having a curl up but if I really like Twitter I would probably you
know again you're looking at other factors you know I would look at the
news things like that is Twitter in solid shape financially that kind of
thing so let's say I decided yes by here okay great well I would have bought here
and what it went down a little bit then it went up a little bit chopped around
that kind of thing okay and as you can see so that would have
been you know right right about here and then it chopped around but it did go up
quite nicely I'm not saying it always happens like this this does not happen
100% of the time alright but at least you know that would have been better
than catching a falling knife like buying here and then have it just keep
going down for the next few days alright so the idea is to avoid that all right
let me show you another example JP Morgan Chase JP m stock daily
candlestick chart big down day that's day 0 but then again
down so still day zero seaside I wouldn't have bought for a little while
okay now if you bought at the right time you would have done quite nicely because
it went up let's take a closer look at that same chart this is a close-up of
the JP Morgan daily candlestick chart so big down day okay day zero another you
know sizable gap down still day zero not even starting account yet another I
don't like this red candle it's too big so not you know still still day zero
still day zero I don't like this one still day zero not comfortable yet not
comfortable yet let's say you've started account here though let's say you were
okay with this candle fine so this would be a day zero but then a gap down so I
would still start over them still day zero still day zero still day zero I
don't like this price action this is a small red candle but with a gap down
still not comfortable with it definitely not comfortable with this one or this
gap down so this is day zero still but then this is this looks like the market
might be ready to quit selling so much okay so this is day zero this is day one
things are looking encouraging day two still looking encouraging day three here
we go I know it's a red candle but almost flat
so you know because it looks like it went up and then closed almost flat from
the from the previous day so I might buy here I would do my research I would look
at it maybe look at other indicators look at the news that kind of thing
but I might buy here okay the point being I wouldn't have bought it probably
during any of this or maybe I would have started to look at it here but then the
next few days no all right so and then you know what about probably around
around here around here and enjoyed a really really nice run up whoops run up
after that okay again it does not always work out that way so I hope this was
helpful to you I hope I clarified the three trading day waiting rule alright
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already and if you want some coaching if you
want some more help I offer the coaching you can email me for that at David
Modell at gmail.com I hope this is helpful to you thank you so much I'll
talk to you again soon
you