What is a Stop Loss Order?

An order (instructions to your stock broker or pre-set in most trading platforms) to sell your security once it trades at a set price. If the price never falls to the stop loss, the order will not be executed. Stop loss orders don’t protect you before you make a trade; they protect you AFTER you enter a position.

Setting stop loss orders limit an investor’s loss on a security position, yet too many investors do not know how to determine the price on a stop loss order. Arbitrarily picking a set percentage, anywhere from 5% to 10%, might make sense for asset protection from a money management perspective. However, setting a 7% stop loss order on a stock that historically fluctuates 10% or more during a seven-day trading period is not a realistic strategy. Setting your stop loss orders based upon your risk tolerance is an emotion based decision - not a technical determination for setting stop loss orders.

The stock market becomes an easy medium for making money when using Candlestick signals properly. The stock market is the cumulative knowledge of all investors buying and selling during any particular time. Just like an individual stock, the stock market itself incorporates waves of human emotion. Whenever human emotion is involved with an investment entity, Candlestick pattern formations  visually clarify what those emotions are doing. The stock market can easily be analyzed when applying Candlestick technical  analysis.

Being able to analyze the direction of the stock market greatly enhances the ability to extract profits. The fact that the stock market moves up and down without major changes in fundamental economic conditions from week to week is a clear illustration that fundamentals do not move markets, the perception of fundamentals is what moves markets. Candlestick signals identify what is going on in investor sentiment and makes it possible for setting stop loss orders at logical points.

Most stock investing systems employ entry strategies that require confirmation after  a specific technical level has indicated a reversal. The confirmation usually involves prices moving up through a price level after a support level has been touched. The advantage the candlestick investor has is being able to view what investor sentiment is doing right at the time prices hit a support level. This immediate information makes setting stop loss orders extremely efficient. Witnessing a candlestick buy signal at an important support level allows an investor to enter a trade before most investors decide to enter that trade. Additionally, the closer the entry level can be established to the obvious support level, the smaller the price move will be in the stop loss order process if prices reverse and go back down through the support level.

Strategies for Setting Stop Loss Orders

Incorporating technical indicators into your chart evaluation provides a realistic picture of historical price fluctuation. This approach still allows investors to weed-out any potential positions that have historial price fluctuations outside of their comfort zone.  Scanning techniques can exclude these and significantly reduce the list of potential stocks for review.  Narrow down the list by incorporating scanning techniques using any of the following; Stop Loss Orders based upon Moving Averages; Setting stop loss orders based upon trend lines and Channels; or stop loss orders based upon intra-day or end-of day price movement. The more probabilities you can place in your favor, the better! But always keep in mind, nothing is set in stone. The 'probabilities' of being in a profitable trade means there is also the possibility that a trade will 'not' work. Most investors have an emotional problem of putting on a trade that they consider to be profitable and then having to immediately close out that trade because it did not work. Being mentally prepared for the possibility that a trade might not work, and being able to view the candlestick signals that indicate a failure of a trade, greatly diminishes emotional attachment. Learning simple stop-loss procedures allows an investor to move funds out of non-profitable situations quickly.