Setting stop loss orders are critical
Do candlestick signals work 100% of the time? Absolutely not. They indicate a reversal in most cases. However, they will fail sometimes and traders need to be prepared for it. Most traders go belly-up because they cannot handle losing trades. There are no 100% guaranteed systems as far as trading is concerned. It is all about probabilities. Traders need to keep this in mind in each and every trade they put on.
Getting out of a losing trade entails two very important things.
1. Knowledge of when to get out of the trade and
2. Admitting to oneself that the trade has failed at that moment (controlling emotions) to take corrective action.
Fortunately candlestick analysis helps greatly in this process. For every major candlestick signal, there is a price level, which if negated, should be considered a failed trade. This level is based on simple visual analysis and has nothing to do with arbitrary percentages or mystical mathematics. What price tells the trader that the bulls have lost control after a bullish candlestick signal? or what price conveys that the bears have lost control after a bearish candlestick signal? These questions can be logically answered by analyzing the candlestick charts.
Consider the following chart of JPASSOCIAT. A confirmed Bullish Engulfing signal in the last week of January was a good entry point on the long side. The expectation was that the stock will try to test its prior high around 165. Three days later, the stock closed below the open of the bullish engulfing candle. If the reason, which was the candlestick signal, is now negated, why should one stay in this trade? There is no reason to. Long position should be liquidated at that point.
Stop loss settings are discussed in detail in our Basic Candlestick Course.
Chart courtesy icharts.in