A Trailing StopA trailing stop is a conditional order to buy stock or sell stock or any other type of equity. A conditional stop order is an order to buy equities such as stocks, options, commodities, futures, or Forex currency pairs once the price has fallen to a specified level or sell once the price has risen to a specified level. It is a conditional order that is configured as a percentage change in equity price or a specific dollar amount change in equity price. Thus a trailing stop moves with the stock price, commodity price, etc., until there is a price reversal. For example, let’s say that the trailing stop on a purchased stock is set at $0.50 less than the purchase price. If the stock drops in price there will be a sell order in place limiting loss on the stock. If the stock rises in price the trailing stop will rise with it. If, later on, the stock falls $0.50 in price the trader will limit his loss, from that point, to $0.50 a share. A trailing stop is a means of limiting loss and protecting gains in trading stocks, trading options, trading futures, trading commodities or trading in foreign currencies.
A trailing stop is a useful tool in limiting losses and preserving gains in stock trading as well as buying or selling stocks in long term investing. However, using a trailing stop is not a substitute for the fundamentals of investing and trading. Both fundamental and technical analysis help the investor or trader pick stocks that are likely to be profitable. Using Candlestick analysis, traders can gauge market sentiment in order to profitably anticipate price movements. In the modern age of online tradingstock traders will almost always use a trailing stop. If, for example, the trader loses his internet connection the tailing stop conditional order can be executed whether he is present or not. Furthermore the use of a trailing stop helps reinforce use of a well thought out trading strategy in which the trader decides in advance how to trade and does not deviate based upon his trading psychology.
With sound fundamental analysis the investor or trader determines the likely direction and destination of an equity price. With skillful technical analysis the trader follows equity price patterns to determine short term price movement. By using a trailing stop the trader or investor insures that he will not suffer undue losses if there is an unexpected market reversal. Using a trailing stop is a means of containing market risk. Whether one is buying stocks or selling short, a trailing stop provides a degree of security in trading. When following market trends, there may be a temptation to stay with the trend, even when a Doji Candlestick signals a likely trend reversal. The temptation might be to think of the reversal as “only a correction” and to “stay the course.” Letting the trailing stop do its job is a way of staying with a predetermined strategy and not allowing a temporary lapse in judgment destroy hard earned profits.
Market Direction: Most investment professionals sagely advise to cut your losses short and let your profits run. The biggest problem with that advice is the professionals never tell you “how” to cut your losses short and let your profits run. Unfortunately cutting losses is a very difficult process. This is because the ego gets in the way. The reason is simple. When an investor makes a decision to buy or sell, it is the result of an evaluation that leads to making the decision. After all the mechanical analysis is completed, the final decision is based upon an investor confirming it is time to buy or sell. Ultimately, the investor has put a piece of their ego on the line. The decision is a reflection of investors analytical intellect. The result of every investment position is going to reveal whether that investor was smart or stupid. Once a position is established and it moves in the wrong direction, most investors have difficulty closing the position at the appropriate time. This is due to the fundamental assumption that ‘we are smart’ in our own minds. It is a difficult process for the ego to realize that our intellectual input did not work, implying we are not smart. Fortunately, candlestick analysis makes this process very easy. The simple logic dictates that if a candlestick buy signal is witnessed, certain results are expected with a high degree of probability. The opposite is that if those results do not occur, the trade is not working. It should be closed out immediately. Once you have learned the 12 major signals, learning where to put stop losses becomes a matter of mechanics, not an emotional decision.
Today the Dow closed just above the T-line after an Inverted hammer signal of Friday. Friday's close made the analysis of the trend relatively easy. The downtrend was still in progress until witnessing a candlestick buy signal and a close above the T-line. Today's close above the T-line will require further confirmation tomorrow. Although there has been a candlestick reversal signal in the Dow, the Inverted hammer signal, followed by a close above the T-line today, further confirmation is prudent because the stochastics are still in a downward trajectory. However, further bullishness in the markets tomorrow would probably start curling the stochastics back into an upward direction.
The mental state of an investor, as well as mechanically imposed disciplines, are important to successful investing. Investing requires discipline. Every investor should utilize an investment program. The obvious reasons include not investing willy-nilly without any guidance or course. The biggest downfall for most investors is their own emotions. The candlestick signals provide a very simple and easy-to-use investment platform. The investment rationale incorporated into the candlestick signals provide insights into investment sentiment that is not found in any other trading method.
Having the ability to identify reversal signals creates an extremely beneficial dynamic for investors. Once an investor becomes comfortable that the signals represent a high-probability situation, investment trading rules can be better followed. The elimination of emotions, especially fear and greed, should be the prime goal for investors.
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