Cut Your Losses Short, Let Your Profits Run

Cut Your Losses Short, Let Your Profits Run

Cut your losses short and let your profits ran is the advice provided by practi­cally every investment adviser in the world. The only problem with their advice is they do not tell you how to do it. Candlestick analysis provides a framework for keeping losses small. The visual analysis that identifies a buy signal or a sell signal incorporates the change of investor sentiment. The result of the investor sentiment change should lead to confirmation of a new direction.

If a candlestick buy signal, which should indicate a new upward trend, is immediately negated by more selling, the message provided by the buy signal loses its relevance. Simply stated, if the sellers are still present, after a candle­stick buy signal is formed, to the magnitude that prices move back down to a point where they override the buy signal, close the position immediately. The buy signal did not work.

Trades are established based upon a signal providing a high-probability situation. If that signal is negated, the high-probability situation does not re­main. Close the position. Move on to an identified high-probability situation. Does that mean this trade will not work? No, it just means that is not working right now. If that trade was implemented because of a candlestick buy signal in an oversold condition, and it does not work, the oversold condition has not disappeared. Continue to watch for the next buy signal. However, the next buy signal may occur two days later or two months later. If a trade is not working, get back out immediately and use those funds to take advantage of another high-probability trade.