When is it Time to Get Out?

When is it Time to Get Out?

O.K., you have the position on. You are in it to maximize your profits with minimal risk. We all want to see a huge rally once we put the position in place. But reality tells us that hitting the right stock at the right time in the right market conditions is a very long shot. Multitudes of events are going to happen that will make us question whether to stay in or get out of a position. Fortu­nately, the candlestick formations provide a simplistic visual depiction of what is going on in the minds of participating investors.

The probabilities of being in an uptrend, after a bullish Candlestick signal, are extremely good. The uptrend may last for a day or two; it may last for three weeks. The signal itself cannot convey this information. As illustrated from some of the examples, there are signals that will show more potential than others. The Gap and Kicker signals are likely to foretell a strong rally.

The uptrend is assumed, but many factors can terminate a rally. Market conditions, news events, rumors, many outside influences can affect stocks upward move. Profit-taking is another common pullback factor. Having knowl­edge of the common “sell” signal formations improve the exit strategy. Combin­ing the knowledge of “sell” signal recognition with stochastics helps the Candle­stick investor distinguish between sellers stopping an uptrend, or whether profit taking is occurring. There are a number of continuation patterns that reveal profit-taking versus reversal patterns.

The same logic should be incorporated in the exit strategies as in entry strategies. The bottom-line thinking should be, “have the sellers taken over?” This can be easily analyzed by evaluating the buying that got the price to the current level and the condition of the stochastics. Numeric formulas do not work for Candlestick formations. The buys and sells are based upon a change in investor sentiment. If the last candle represents buying, the trend should continue until the sellers demonstrate that they have overpowered the buying. A sell signal or a weak price move will demonstrate the buyers are exiting the trade.

Note in Fig. 9-9, Meridian Gold Inc. had strong buy signals a few days before the actual major run-up. A gap up (Kicker Signal) formed followed by another day of buying. Nothing in this chart would have indicated the next three down days. How do you protect yourself from this event? Each evening, analyze each posi­tion. What would the price action have to do the next day to reveal that the sellers had taken over, more than just some profit taking? In the Meridian Gold price movement, it would have been logical that if the price closed below the halfway point of the previous day’s trading range, the sellers may have taken over control.

How does one protect from this action? When a buy signal is negated by a “sell” signal, there should be some immediate evaluation as to what the trend is doing. In this day of inexpensive commissions, if the situation is causing some doubt as to the direction of a trade, get out. With Candlestick signals providing more excellent picks every day than what any investor could utilize, why stay in a position that is casting doubts? Liquidate the trade and go on to a high probability trade.

As mentioned in “Profitable Candlestick Trading” there will be a common price action described as a “scary” day. A scary day usually occurs about two, three, or four days into a new trend. After moving up for a few days, the sellers or profit takers knock the price of the stock down hard early in the day. However, by the end of the day, some of the sell-off is recovered. It creates an evening of great investment decision turmoil. Was this day just a last gasp sell-off or was there some new dynamic that was changing the trend direction? If the stochastics, as well as the other indicators, appear to be acting strong, let the price play out the next day. Stocks do not go straight up; expect a trend to have some pullback days.

The ultimate up trend is a majority of white-bodied candles with an occa­sional dark body candle created by profit taking. Note in fig. 9-10, tire up-trend of Horizon Offshore Inc. the appearance of dark candles. Though scattered through the uptrend, they never formed a “sell” signal, just periodic profit­-taking days.

Exiting a trade uses the same simple premise that the buying side of the trade uses. Are the buyers still present? It is not uncommon to witness a double bottom at the bottom of an extended downtrend. It represents the buyers com­ing into a stock, moving it up, and then the last of the sellers come back. This moves the price back down to, or close to, the recent lows. This formation is observed after a few days of up move; the trend experiences some small sell signals and moves back down to the recent lows. Recognizing the small sell signals may take some time to get accustomed to, but it is easy to review the price action at the beginning of trends by looking through past charts. Find up trends. Examine what price actions occurred. This will accomplish two func­tions.

If you are still learning the signals, it will reinforce the recognition of signals at the turns. The next tiring investors want to become familiar with is what formations appear in strong up moves versus what formations appear in rallies that fizzle out quickly. The visual advantage of the Candlesticks is the definite contrast created by the dark and light candle bodies. As can be imag­ined, the more dark bodies seen in a trend, the tougher that trend is having to move to the upside. The earlier you witness dark bodies, the greater the probability the trend is experiencing new selling.

Studying the previous trading in this chart provides the insight that a trend will continue because no definable Candlestick “sell” signal appeared. There were some potentially doubtful moments, but the uptrend was com­pleted because the selling candles showed consolidation versus an outright reversal, no major change in investor sentiment.

Simple Rules

Being that the Candlestick signals are formed by price moves, and not by any numeric quotas, percentage stop points cannot be applied. The basis for stop losses in Candlestick analysis is simple. If a signal is created by the evidence of buying, then a complete retracement of that signal reveals that the sellers have undone what the buying did. Simply stated, if the confirmation of one of the Candlestick formations was a price move from $10.50 to $11.25, then it would be assumed if the sellers push that price back down through $10.50 they were back in control. In other words, the price coming back down through the begin­ning of a buy signal negates the signal.

Once an uptrend starts, if an opening price appears more than one-halfway down the previous white body, be ready to liquidate immediately. This implies that something changed during the non-market hours. Be prepared to sell if prices appear to want to trade lower, especially if there is bad news reported overnight. When a stock price gap down dramatically, profitable strat­egies can be implemented based on the trend, prior to the announcement.

Some charts will reveal a day that shows strong buying followed the next day with some selling. Expect this as a new trend is developing. However, if Day 3 shows buying, then Day 4 shows selling, there is reason to be concerned. The sellers are not stepping out of the way. The strong buying is not evident. Take a tiny profit and find another trade with more upside potential.

When in doubt, get out. There is no economic reason to not get out of a trade if it shows weak indications after you have just bought it on a strong buy signal. First, there are many more trades to be found. Second, there is no rule to say that if a position looks doubtful, get out and watch for the next buy signal. Not all stocks go up on a “buy” signal. The majority do! It is sometimes prudent to get out of a position and then come back in later when the signals demonstrate a more bullish situation. The point is not to make the most money from each trade; the purpose of successful investing is to make the most with the dollars available.