It is important to understand the psychology of investing and the stop loss concept; while making those impressive deals in the market, emotions are high and a stop loss strategy is the farthest thing from anyone’s mind. But when the losses start coming, so does the feeling of falling down a well, hopelessly tumbling all the way to the bottom. Remember, that 50% loss started off as an innocent 5% loss. That moment of truth in the well has everyone wishing for a net. A strong stock trading system, such as the candlestick analysis stock market investing technique, and a stop loss strategy is just the net you need when falling down the well of a bad investment.

For this exercise, let’s work with one of several simple stop loss strategies. The technique we will discuss is called the “trailing stop loss” strategy. Simply put, calculate the cost of your investment, set a percentage that you consider a reasonable amount for the stock to turn around, and calculate a trailing stop loss based on that. For example, you bought 100 shares of Stock A at $10 per share and the fee for the transaction was 3%, with a total for the transaction being $1,030. Through candlestick analysis, you determine that 10% is a realistic turning point for this stock; therefore, your trailing stop loss would be $9.27 per share. (Notice that the cost of investing is included in this calculation. Always consider the cost of doing business in any business decision.)  If your stock dips below that, you sell and cut your losses. By setting your limit before the transaction, you avoid allowing your greed and fear to control your decision of when to sell. This little stop loss strategy is a simple hedge against big losses, and the best part is that you can protect your gains the same way. As your investment increases from profits, simple recalculate your stop loss.

It seems more difficult than it really is. As with all good stock market strategies, emotions should always be left out of investment decisions. Being able to see the need for stop loss strategies is a good indication that an investor realizes that not all investments will be profitable. It is crucial to use stop loss strategies & techniques developed by others who have experienced the same downfalls, add them to your stock technical analysis, and bring it all together with a strong system. This will improve the success of any investor and prevent “falling down the well”.

Market Direction: What does a sustained, steady uptrend in the market do for a candlestick investor? It allows for prices to move with more force after a candlestick signal is identified. The slow uptrend of the Dow and the NASDAQ continually builds investor confidence. The longer investor confidence keeps growing, the higher the probability candlestick buy signals eventually exhibit exuberant buying.

Having the ability to analyze investor sentiment during a market trend provides valuable information. In uptrend that is in a continual process makes individual stock prices dramatically more profitable. This occurs when a candlestick buy signal identifies a new uptrend in individual stocks. The longer that stock price moves in a steady uptrend without fear that the market in general is going to sell off, the exuberant buying that is usually exhibited after a price move has persisted becomes evident. Going to back to the basics of investing, where do most investors buy? They buy exuberantly at the top.

As experienced in a number of the Candlestick Forum's stock recommendations recently, strong price moves have been occurring in bullish chart patterns. This becomes a function of a bullish reversal signal starting an uptrend when the market conditions indicate that the uptrend is persisting. The longer an individual stock price keeps moving up, the more confidence the latecomers start exhibiting. If a strong candlestick 'buy' signal starts an uptrend, the uptrend has a much greater probability of showing exuberant buying well into the trend. This is just common investor habits. It occurs month after month, year after year, decade after decade. It is very important to be able to identify what the markets are doing in general, then applying that knowledge to holding individual stock positions.

The previous newsletters have demonstrated analytical techniques that revealed that the market was in a steady uptrend. Bouncing off the 20 day moving average, maintaining a trend channel, watching what crude oil prices were doing; and most importantly, not witnessing any severe candlestick sell signals. The scenario remains the same. The uptrend will continue until there is a drastic change of investor sentiment. What could be signs of a top? Two or three big candle days to the upside, a gap up on the open, a dramatic gap down on the open. Each of these factors would immediately create concern in the current investor sentiment. Knowing how each candlestick signal is formed provides a head start for the candlestick investor to anticipate a possible reversal. The lack of any of these conditions indicates that nothing has changed the current investor sentiment.

Dow

As the Pozen chart reveals, the uptrend started with a strong bullish signal. As the uptrend in the market persisted, the uptrend in the stock price was able to continue. The longer the uptrend persisted in the stock price, the better chance for exuberant buying to start coming into the trend. As seen in the past week, the price of the stock has moved up over 20%. These types of price moves have been occurring in positions that are being held in the positions-recommendation area and being discussed in the daily chat room.

POZN

Empire resources (ERS) was up 17% today after a slow steady uptrend. ADTN has moved up 8% since the gap up from the doji over this past week of trading. EEE has moved up 15% in the last two days a trading after a steady uptrend. ATHR is up over 20% in the past two weeks after the Bullish Engulfing signal. It is continuing its uptrend after the identification of a Jay-hook pattern. Are these types of returns always provided by candlestick signals? Certainly not, but when they do occur, the signals have the candlestick investor positioned in the right positions at the right time and indicate when to continue holding during these price moves. This is not difficult analysis. Fortunately, candlestick analysis is a very simple methodology to learn. It is visual analysis incorporating common sense. This learning process also is expedited in the Candlestick Forum's chat room during market hours on a daily basis. This is an area where investors can learn from other investors with actual trading analysis.

Good investing,

The Candlestick Forum Staff

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