How to Set Your Stops

Set Your Stops

A major human flaw, setting a stop, and then changing our mind when prices get near the stop price. That process defeats the purpose of setting the stops in the first place. Why do investors change their minds? When making irrational evaluations, investors will make irrational decisions. However, in the heat of trading, emotions come into play. As demonstrated in our Entry and Exit Strat­egy chapter, candlestick analysis places stop losses based upon logical selling indications. If you find yourself in a situation where you are questioning your own stop-loss decision, remind yourself that you made that stop-loss point based on clear, non-pressured analysis.

Setting a stop at a pre-derived percentage movement means nothing. The markets do not care where you bought. The price is going to move up and down in a trend. Trends can have short-term pullbacks. The basic reason for establishing a stop loss is to be out of a position if it is not confirming the reason for being in the position. Candlestick signals make stop-loss proce­dures relatively easy. If you are buying based on what a candlestick signal implies the buyers should now be in the trend. Price moving back down through the level that suggested the buyers were taking control, reveals that the sellers were still in control.

Entering a position is based upon a signal. Visually, a trading level should be recognized as an area that would indicate that the buyers did not follow through; the sellers were still in control. Use that as your stop. Prices breaching that area negates the reason for being long. Close out the position. That is how you cut your losses short.

When you visually analyze where the stop loss point should be, it will not change the scenario once you have put your position on. If you anticipate that a percentage of the established trades may not work, then utilize the candle­stick stop-loss process.

There will be more high-probability trades to move your investment funds into. Get out of the bad ones immediately and move to the good ones.