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Stop-Loss Issues with Candlesticks

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Joined: 19 Jul 2006
Posts: 8

PostPosted: Wed Aug 23, 2006 9:19 am    Post subject: Stop-Loss Issues with Candlesticks Reply with quote

I know that Mr. Bigalow in his books recommends placing the initial stop-loss order at the point at which it would mean that the trade's potential has fizzled, such as the bottom of a bullish white candle, or a close between the half-way point of that candle. However, I'm still a bit confused over what to do if the trend DOES do what it's expected to do and start rising (assuming a long position). I would think that once this has happened, leaving the stop-loss at the bottom of the initial candle would make it way to wide. Do any of you, in fact, adjust your stops as trends continue? If so, based on what (such as a low-of-the-past-three-days type thing)?

Also about stops, for an engulfing pattern, the author seems to recommend using the bottom of the engulfing candle as a stop-loss point (or, again, a close half-way down that candle). What if the engulfing candle is so large that it would make such a stop-loss point too wide? In such as case, have any of you found a good way to handle the stop-loss more conservatively?

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Joined: 09 Feb 2006
Posts: 23

PostPosted: Mon Aug 28, 2006 1:57 pm    Post subject: Reply with quote

Do what's comfortable for you. As the trade progresses there are new candles to interpret. That means the stop probably needs to be moved.
Are you buying huge engulfing patterns or marubozus? Did they pass through some support/resistance or moving averages? That gives you another clue to setting your stop.
This ain't rocket science, it's mostly just informed guessing. Steve tries to catch the "meat" of the trade. Sometimes your stop will just be flat wrong. Seek precision, but expect errors.

Posted: Fri Aug 04, 2006 2:36 pm Post subject:
Another thing that makes this easier is to only trade Low Risk Ideas. Doesn't it make sense to trade only those signals that offer a logical stop that is quite a bit tighter than usual? Why trade a stock which has to fall 5% before you know you are wrong when you could trade one where the stop is only 3% away?

Or to use the amount you're risking to determine your position size? i.e. maintain the same amount at risk for all your trades, meaning you will trade a smaller size if your stop is farther away from your entry point?

See Tharp, Trade Your Way to Financial Freedom
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