Trading with Candlesticks: Question with stops

[Nubrand 10]

I have been learning candlesticks for some time now and I have a question regarding setups and stops.

 

I have been told that instead of using a fixed amount for a stop, place the initial stop at the point where you are absolutely certain you are wrong. I am not too comfortable with this since this can mean having a fairly wide stop.

 

For example on a bullish englufing pattern, I would enter on the second green bar. By using an initial stop mentioned above, it would be right below the first tall green bar. This is usually a fairly wide stop.

 

How can I adjust my stops to a more conservative way and avoid using wide stop loseses? Thanks!

[Stockaddict 10]

Stops really depend on the setup you use. Some setups require a wider stop while others can be traded with a tighter stop.

 

Do you know the ATR of the underlying stock you are trading? For example, the SMH can be traded using a tighter stop then Google for example.

 

Also, swing trading requires a wider stop then day trading. You need to understand this. If the current strategies you have do not fit your risk parameters, perhaps you should look for alternative trading strategies?

 

Stockaddict

[Soultrader 12]

Try learning to read tape. It will help you better on your entries and you can use tighter stops that way.

 

I don't base my entries or exits on candlestick patterns. I use mainly pivots and key support/resistance. This way I can use a limit order near the pivot and use a stop fairly tight stop.

[trader273 10]

I use candles in my trading as well. i tried the fixed stop, the atr stop, etc. I constantly found that if i was getting stopped out too quick, and then proceed to watch it move in my favor. If you want to use candles, I would highly recommend placing the stop at the high plus one or 2 ticks ( if going long, opposite for shorts). I don't know your exit procedure,but yes, some trades will have wide stops and then you have to decide if you want to risk that much. I have max that I'm willing to lose and that means some trades I must pass on. I would suggest, if you haven't already, pick up one or 2 of Steve Nison's books. He talks about all the patterns and stops. Though he doesn't go into how to take profits, as candles dont give profit targets.

[RhodyTrader 10]

I have been told that instead of using a fixed amount for a stop, place the initial stop at the point where you are absolutely certain you are wrong. I am not too comfortable with this since this can mean having a fairly wide stop.

 

If the stop has to be wide, then your position has to be smaller. It's that simple. If you have a small account and the stop you would use implies too much risk in the trade for a single unit position, then you are better off not taking the trade and waiting for another opportunity.

 

Traders often get fixated on having close stops because they think that means lower risk. That's not true. Closer stops are more likely to get hit by normal market action (noise), which actually makes them more risky.

[nicknextmove 10]

I have a tough time with entry and stops as well.

 

Made $170 with YM today only to give back $140 back later in the day because of a bad entry (and no stops).

[MrPaul 10]

If the stop has to be wide, then your position has to be smaller. It's that simple. If you have a small account and the stop you would use implies too much risk in the trade for a single unit position, then you are better off not taking the trade and waiting for another opportunity.

 

Traders often get fixated on having close stops because they think that means lower risk. That's not true. Closer stops are more likely to get hit by normal market action (noise), which actually makes them more risky.

 

 

 

I agree! I like to put stops close enough to be valid from a money management standpoint, but intelligently placed under areas of "Price looks like it's reversing here" type of thinking.

[MrPaul 10]

I have a tough time with entry and stops as well.

 

Made $170 with YM today only to give back $140 back later in the day because of a bad entry (and no stops).

 

Hey nicknextmove,

 

If you don't mind me asking why was your entry bad?

[nicknextmove 10]

Paul,

 

I entered long in a down trending market with the expectation that the DOW would rebound - as was the case during the last few days when the DOW would close in +ve territory.

 

I entered over the support area as expected but ....

 

PS: This is a pattern that I used to see previously - sell off 11:00 - 11:30 PST and then move up into the end. Looks like it did not work today.

[ezduzzit 10]

Well, nothing works all the time folks. The only constant is change. RhodyTrader and Mr. Paul nailed the answers to stops already and there is really nothing useful I can add other than to reinforce and agree with what they had to say. Trading is a business of probabilities, nothing more. However, lest you think otherwise, your job is to place a trade you feel comfortable in taking, and then immediately begin watch for signs that what got you into that trade may be faltering or failing. There are no gold stars given for holding on til that trade eats its way all the way back to your stop.... so you should not be letting it happen very often. Also, don't be shy. If you got out quckly for breakeven or a very small loss and it turns to go back in your original direction, it only costs a commission to jump right back in and ride it. Just realize that a good portion of the time you are going to be wrong... and this business is about controlling your losses and playing by the rules of your method or strategy.

 

Good luck and Happy Trading