Candlestick Stop Loss Strategies
Candlestick Forum Stop Loss StrategiesCandlestick TradingForum Stop LossStrategiesSimple, Common SenseTechniques To Protect YourAssetsA Candlestick Trading Forum publication – Years ofCandlestick Analysis made available in concise formats.Information that when learned and understood willrevolutionize and discipline your investment thinking.Copyright @ The Candlestick Forum September 2003 All rights reserved1
Candlestick Forum Stop Loss StrategiesCandlestick Stop LossStrategiesProgress always involves risk. You cannot steal second base and keep your foot on first.Frederick B. WilcoxProtecting your assets, that is the main function of putting on stoplosses. It is to provide a point where the reason for buying becomesnull and void. Many trading strategies incorporate them into theirtrading formulas for closing a trade that has gone sour. Usually thisis done by establishing a percentage loss as the parameter. Thecandlestick method completely disregards a preset formula forstopping out.There is a major flaw in using a prescribed percentage loss as thestop loss. Your purchase price becomes an important function ofwhere you are to stop out. Some investment advisors recommendthree percent as the stop out level. Others suggest eight percent.But where you buy a trade position now becomes the quantitativeelement of where you should place your stop. A couple of extremedisadvantages become apparent.A buy recommendation is placed on a stock. You are advised toplace a stop at a preset number, for example, three percent belowyour entry price. The buy is placed on a stock at 50.00. However,2
Candlestick Forum Stop Loss Strategiesby the time you get executed, you have paid 50.80. Buying thestock at 50.00 would have meant your stop out level was 48.50.Your entry at 50.80 now means that the stop loss is to be placedat 49.27. As often mentioned in candlestick analysis, where youbought a stock or sell a stock does not mean a hill of beans to themarket. Your arbitrary level of where to come out of a trade hasabsolutely nothing to do with what the price trend should be doing.What if 48.50 is a level that negates the uptrend move, but 49.27does not change the trend direction.Your entry level, although may not have been the ultimate point toget in, 49.27 may not have been a level that affected the uptrend.You could get stopped out while the trend direction was still valid.Additionally, the volatility of a particular stock has a great bearingon whether a trend has been affected. A three percent pullback onsome stocks might be more than big enough to reverse a trend,while a ten percent move in other stocks are common and is not afactor on the trend direction.The most important factor for establishing a stop loss is very basic.What price point would indicate that the established trend has beennegated? This now becomes a stop loss level established basedupon the trend being stalled and/or negated. As with all ofcandlestick analysis, this becomes a “common sense” evaluation. Ifyou have put on a long position, based upon a bullish buy signal,where would the price have to back off to confirm that the sellerswere still in control?The person who knows how will always have a job. But the person that knows why will be theboss.Carl C. WoodAnother important factor is having an idea of which direction themarkets are moving in general. Logic suggests that if the marketsare in a downtrend and a buy signal is witnessed in a specific stock,then the uptrend needs to be diligently followed versus a buy signalappearing when the markets are in an uptrend.The simple visual evaluation establishes the proper stop loss pointas it pertains to that specific stock position, taking intoconsideration the volatility of the stock and the signal that createdthe buy signal. A stop loss on one stock may be relevant at a closelevel whereas the next stock position requires greater latitude.Candlestick analysis allows the investor to establish a stop loss thatwould logically indicate the sellers were still in control, and thebuyers have been overcome.3
Candlestick Forum Stop Loss StrategiesWhat Does the Signal Tell You?Keep in mind, not all trades work. “Probabilities” of a successfultrade, after witnessing all the parameters that make for a successfultrade, is the key word. Although the probabilities are greatly in yourfavor, there is also the small probability that a trade will not work.The signal itself is still the result of centuries of observations:Observations that were reinforced by profitable trades. The signalshave meaning. They represent the change in sentiment of thebuyers and sellers. The signal comprises that new change. Thecandle formation is the basic element of the reversal signal.However, when that reversal signal illustrates that a new force hasentered the market, but is immediately negated by the original trendforce, it is clear that the new trend is now nullified. Get out of thetrade immediately.Does that mean the analysis was not correct on identifying thesignal? No. If a buy signal was formed in an oversold condition,candlestick analysis establishes that there is a high “probability” forthat trade to make money. Again the word “probability” is whatneeds to be addressed. The trade should make money. However, ifthe trend does not establish itself, it becomes obvious if you knowthe candlestick signals. Your stop loss strategy now becomescustomized to that trade set-up. This is an easy visual process.Take each signal set-up, knowing what makes it work, and set yourstop loss price based upon where that signal would be negated.Negating the signalWhat created the signal? The Bullish Engulfing pattern, the Dojifollowed by a bullish confirmation day, a Hammer signal confirmed,a Kicker signal? When a signal is created, we will see the candleformations that established the new trend. That becomes the stoploss criteria. The same rules for what makes a successful signalcan be used for showing what makes the signal unsuccessful.Everything comes to he who hustles while he waits.Thomas A. Edison4
Candlestick Forum Stop Loss StrategiesEstablishing the level showing the trade is not working builds muchmore control in the investors’ psyche. They establish where theyget in and out of the trade instead of arbitrarily setting stops thathave nothing to do with how a trend should be working. That controlcan be directed to making proactive decisions versus passivereactive watching. It allows the candlestick investor to prepare forstrategies to re-establish a trade in the same position, based uponselling when the trade was not working and getting back in whenthe trade is working again.Initiating a TradeA signal has significant meaning. Knowing that, the thought processfor when to stop out of a trade becomes easy. A buy signalindicates a new trend. What would counter that “indication”?Probabilities mean being in that trade has favorable odds forprofitability, but not any guarantees. Even though a majority of thetrades will work using the signals, this also means some tradeswon’t work. Keeping that mindset in focus, stop loss analysiscreates a format for identifying when a trade is not working andgetting out of the trade as soon as possible.Establishing the stop loss point is using the same common senseapproach that is incorporated throughout the candlestick method.Examine the chart of Wynn Resorts Ltd. Note the three SpinningTops on July 23, 24, and 25.5
Candlestick Forum Stop Loss StrategiesWynn Resorts Ltd.Two Spinning Tops and a positiveDoji, the Doji day should havebeen the purchase day.The gap up on July 28 should have been the buy signal, the entrybeing at 16.50. A big bullish candle the next day followed by acouple of Dojis. The Bearish Engulfing signal the following day, withstochastics still heading up, may not have convinced anybody thatthis uptrend is over. What becomes an obvious level that wouldindicate they were not taking the trend up any more? The bottom ofthe large white body on the 29th becomes a logical level. If thesellers take it back down through that level, the trend is obviouslynot up anymore.What does that do for profits? Break-even. But if you can breakeven on the bad trades, that is not bad at all. Built into thecandlestick trading concept is a factor not evident in most othertrading systems. The signals provide that extra day or so of gettingin earlier than the other technical methods, which need moreconfirmation than what the candlestick signals provide. Getting inthat much lower makes the sell stop levels more effective. Thenegation of a buy signal is very close. For example, getting into aposition at 10.00, when the 9.50 level indicates a failure of thattrade, is much better than getting in the trade, using othertechniques than candlesticks, at 10.70. The failure level, after6
Candlestick Forum Stop Loss Strategiesentering the trade using a candlestick signal, makes the loss muchsmaller and less time consuming.What are you expecting to witness after a buy signal? More buying,of course. That sounds trite, but that is exactly what the buy signalsshould reveal. Note in the Millennium Pharmaceutical chart, theBullish Engulfing pattern on January 23, 2002.Millennium PharmaceuticalThree days of nobuyers and a closebelow the halfwaypoint of the large whitecandleBullish EngulfingSignal in oversoldareaStochastics oversold and turning up, the Bullish Engulfing signalfollowed by a gap up open the next day. This is the perfect buyscenario. However, as we see, it closes lower that day. Notdisconcerting, it is not unusual to see residue selling from theprevious trend still around. The important point is that a BullishEngulfing signal, in an oversold area, has appeared. The followingday a Spinning Top signal, a good sign, the selling of the previousday may have stopped. The following day, a higher open, but thena lower close. What should now be gleaned from the chart? Theobvious, there is no extensive buying now for three days after thebuy signal. Basic analysis tells us that if a buy signal occurs, thenwe should see the buyers continuing the trend.7
Candlestick Forum Stop Loss StrategiesThe fourth day after the Bullish Engulfing signal results in a closemore than halfway down the Bullish Engulfing candle body. Thehalfway point of that body represents an important factor. Thesellers are now more evident than the buyers that formed the whiteBullish Engulfing signal. The sellers are stronger, get out of thetrade. Plus it is now four days after the buy signal and no buyershave made their presence. The trend is not up. Move to a bettertrade.Learning is not child’s play; we cannot learn without pain.AristotleThe halfway point of a body that creates a signal is the pivotalpoint. At that level, the existing trend has negated the new trendindicator. This works for both directions, bullish and bearish trendreversals. Does that mean the trade should be ignored? Definitelynot! The reason for buying in the first place was due to a buy signalappearing in oversold conditions. The conditions have not changed.It is still oversold. And there were buyers that stepped in once atthese levels. If the first entry does not work, keep an eye open forthe next buy signal. That will be stronger because the sellers willsee that even though they overcame the first buying signal, thatanother buy signal illustrates new buying is starting again. Thesellers now may just get out of the way.The halfway point is crucial. As seen in the Kana Software chart,the bullish breakout signal indicated new investor sentiment.Trading at the 3.00 range for a month and a half suddenly has anew dynamic come into the price of the stock. This is a good timeto buy. But the next day it backs off. Should that be a worry? Notreally. It is not unusual to see some residue selling after a bigpercentage move. A Harami is formed. At this point in the newtrend, the Harami indicates a day or two of consolidation before thenext leg up.The next day, it continues to back off. However, note the candleformation, a Hammer. That alone reveals that the buying hasstarted back in. Secondly, notice where it closes, above the halfwaypoint of the body of the white candle that initially indicated the newsentiment in the stock. Importantly, that day revealed the buyinghas presented itself again and illustrated the buyers were stillslightly in control.8
Candlestick Forum Stop Loss StrategiesKana Software Inc.Now the stop loss decision-making process becomes simplified. Ifthe price closes below the halfway point of the large white candleon the third day after the bullish candle, it becomes obvious that thebuyers are not around anymore and that the sellers are a strongerforce. Close the trade. On the other hand, the overriding facet tothis trade was that strong bullish candle day, which should havebeen evidence a new attitude was being applied to this stock price.That direction will persist until there are signals indicating thedirection has been negated. Expect the probabilities to continue theuptrend. As seen in the chart, the third day showed the buyerscontinuing what the first big bullish candle indicated.To summarize, use the halfway point of the bullish candle as thelevel that would demonstrate the buyers were not in control anymore. Also, a buy signal should represent the buyers are takingcontrol. After the third day, if no new buying becomes apparent,that should imply that the buyers are not around. Take those fundsand move to a higher “probability” trade.9
Candlestick Forum Stop Loss StrategiesThe Inverted Hammer is an excellent buy signal. Remember, thebasic rule is if witnessing an Inverted Hammer signal and seeingthe price open positive the following day, with stochastics in theoversold area, the probabilities are extremely high this will be aprofitable trade. As expected, the trend should continue upwards.With that knowledge, placing a stop becomes very logical. If apositive open indicates the trend should be up and usuallyimmediately, then a close below the open of the previous day, thebottom of the Inverted Hammer’s small body, would signifyimmediately that the signal did not work. Close out immediately orput your sell stop at the previous day’s open price.Review the Kana chart again. June 16, 2003 created the perfectset-up for an Inverted Hammer trade. It opened higher that day.This is the exact proper set-up for starting an up-move from theInverted Hammer signal. But there was no follow-through in thebuying.Kana SoftwareInverted Hammerwith a positiveopen the nextday, Should havebeen out of tradeon the close.The price moving back down through the previous day’s open, thebottom of the white body of the Inverted Hammer, would be thetelling story. The buyers are not present, as hundreds of years of10
Candlestick Forum Stop Loss Strategiescandlestick charting analysis revealed that they should be.Breaching that point should be the stop loss level.The same analysis can be seen in the Neoware Systems Inc. chart.The Spinning Top signal, followed by the bullish candle, creates aperfect Morning Star signal at the oversold stochastics area. Twodays after the Morning Star signal, a black candle closes more thanhalfway down the white body of the Morning Star “buy” formation.The sellers are still dominant. Take those funds and move to ahigher probability trade.Neoware Systems Inc.A close more than halfwaydown the bullish signalcandle, time to get outThe Spinning Top is the Star ofthe Morning Star signal, a buysignal with stochastics oversoldThe same rationale can be applied to the Hammer buy signal. Toreview, seeing a Hammer signal in the oversold stochastics area,with a positive open the next day, indicates the buyers are back inthe trading. There is a high probability that the trend has reversed.That given, the trend should be moving up from that point. Rarelywill you see a Hammer in the oversold area, with a positive openthe next day, fizzle and move back down. That is the reason we stillutilize the signal after hundreds of years. The signal discloses a11
Candlestick Forum Stop Loss Strategiesnew investment sentiment has entered the stock price. However,the operative word is “rarely”.This same scenario should not see a positive open and a closebelow the body of the Hammer signal. A close below the body,whether a white or black body, negates the concept of the bullishimplications of the signal. Close the position.As seen in the Kindred Healthcare stock price, the buy signals arefollowed by sell signals. Even what should be considered a strongDoji/Hammer signal, confirmed the next day with a positive open,immediately shows weakness. This now becomes a trade that hasno follow-through buying, not a trade you want to be in.Kindred Healthcare12
Candlestick Forum Stop Loss StrategiesAdvanced Micro Devices illustrates a chart pattern that set up witha Doji at the bottom, followed the next day with a positive open, astrong buy indicator. Even the next day after that gapped open tothe upside. But it traded lower from that point, creating a blackcandle. The lower open after that was expected, anticipating that aDoji or Hammer forming that day would stop the selling andcontinue the uptrend. The close, being lower than the Doji that firstindicated the reversal to the upside, now reveals the sellers haveoverpowered the buyers. Not a position representing buying anymore. A bad trade. Close it and move those funds to a strong chart.Advanced Micro DevicesSelling that negated the buysignalsA Doji, followed by a move up,the buy point13
Candlestick Forum Stop Loss StrategiesIllustrated in the Sports Authority Inc. chart is another InvertedHammer that set up exactly as it should for producing a profitabletrade. The stochastics nearing the oversold area and a strongInverted Hammer should have prepared the candlestick investor foran opportunity the next day. The opportunity would have presenteditself by a positive open after the Inverted Hammer signal. Buyingon the open the next day was the right execution. The little sellingday after that did not change the direction of the trend. However,the fact the sellers could push the price back down through thebody of the Inverted Hammer which initiated the buy gave a clearindication the sellers had overpowered the buyers.Sports Authority Inc.The positive open after anInverted Hammer day, a highprobability signalThe sell stop levelAs illustrated in the chart examples, the basis for proper stop losslevels using candlestick analysis, boils down to one simpleobservation. What level demonstrates more sellers than buyers?That revelation can occur the next day or after three days or so. Ifno new buying comes into the stock, this does not reinforce the buysignal. Take the funds and move to a chart that shows buyers.Does that mean the trade is dead? No. Watch it. It has alreadybeen evaluated as being oversold. The buyers may still be ready tobuy in that price level. The next buy signal will reveal the buyers areback again. This same message will be noticed by the sellers. They14
Candlestick Forum Stop Loss Strategiesmay start backing away from their selling or start covering theirshorts.Examine the chart of Boston Communications Group in mid-July,2003. After the big drop, an excellent candlestick buy signal, aHammer with a bullish confirmation candle, presented itself.Stochastics are at the bottom, trying to turn up.Boston Communications GroupAs the price came back down through the halfway point of the largebullish candle, that should have been the alert the buyers were notaround any more. However, the close is the important factor. Itcould have done a Hammer formation the second day after thelarge white candle, closing above the halfway point. Upon seeingthat it was closing near the bottom of the white candle would havebeen the clue that this trade did not have the buyers’ support anymore.The strategy for setting stops when utilizing the signal
Feb 02, 2003 · Candlestick Forum Stop Loss Strategies Candlestick Stop Loss Strategies Progress always involves risk. You cannot steal second base and keep your foot on first. Frederick B. Wilcox Protecting your assets, that is the main function of putting on stop losses. It is to provide a
Candlestick chart is a kind of a bar chart defined by opening, closing, high, and low prices. If the opening price is lower than the closing price, a hollow candlestick is drawn indicating uptrend (Bullish). In the other case, a filled candlestick is drawn showing downtrend (Bearish). (A) Bullish candlestick (B) Bearish candlestick
Bullish Candlestick Patterns Free PDF Download[/caption] Bullish Candlestick Patterns Free PDF Download Candlestick patterns are one of the most important tools in a trader's toolbox. They can be used to identify potential reversals, continuations, and breakout opportunities. There are many different candlestick patterns, but some are .
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predictability of candlesticks are reported [4]-[6], while positive evidences are provided for several candlestick chart patterns in experiments using the U.S. and the Asian stock 7]-[10]. d out that candlestick chart pattern [2 ][7][11 . The candlestick chart p
Candlesticks have precise definitions and fixed time intervals which gives approaches based on candlesticks an advantage for research. They are easier to understand, analyze and work with [7]. Figur 1: Candlestick illustration [8] 2.4 Candlestick Patterns A candlestick represents
A candlestick chart pattern in which a large candlestick is followed by a smaller candlestick whose body is located within the vertical range of the larger body . In terms of candlestick colors, the bullish harami is a downtrend of negative-colored (RED) candlesticks engulfing a small positiv
Forex indicators and the way they should be traded when spotted on the chart. WHAT ARE FOREX CANDLESTICK PATTERNS? Forex candlestick patterns are special on-chart formations created by one, or a few, Japanese candlesticks. There are many different candlestick pattern indicators known in Forex, and each of them has a specific meaning and .
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