Candlestick & Breakout Patterns
Not Realize Profit & Price Went Down Ends Up Losing vs Take Profit Too Early & Price Went Up Further
Ming Jong Tey
Publish date: Wed, 25 Jan 2017, 10:37 PM
Ming Jong Tey
0 68
Understand the psychology behind the candlestick & breakout pattern will give you an edge to realize why the market does what it does and anticipate opportunities before they happen!
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Did it happen to you before? Has this been bothering you from time to time?
This is one of the most popular questions I got from my readers.
No matter you are a trader or value investor, it is such an annoying problem, isn't it?
You are not alone. I am here to share with you ways to cope with the psychological barrier when we tackle on this issue.
Trade Management
After we hit the buy button and the orders get filled. We sit back and hope for the price will go up like a rocket.
******************************* Part 1 *********************************
Sometimes, it did happen. The price shoots up and trends higher within 3 days. Now, we start digging out more information based on either fundamental/news or technical analysis, in order to justify our hope --> Yes, the stock will trend higher based on XXX catalyst, earning visibility, optimistic global economy, growing sector, momentum breakout, analyst upgrade, etc...
Day 4, the stock price starts to drop a bit.
"It is ok...profit taking is quite normal after a significant move. At least I am still in the profit."
Day 5, the stock continue to slide down with low volume.
"Never mind. It drops with low volume. It is most likely a pull back. There is 30% upside based on the analyst target price. Now I only profit less than 1%, no point to sell now. If I were to sell, I should have sold at YYY and I could profit 7%."
Day 6-10, the stock consolidates around the entry price.
"Alright, I am at break even. I can't sell now because I will lose the commission plus my effort to buy the stock".
Day 11, the stock plummets 5% with 5X of the daily volume due to the earning announcement. The quarterly earning is lower than the last quarter's though it still beats the same quarter's earning last year.
"Fxxx! Didn't expect the earning will be lowered. Shouldn't follow the analyst, after all..." Paper loss of 5%, I swear I will get out of this when it go back to my entry."
Day 12, the stocks drops another 2% (hit the stop loss as planned at 10am) but goes back up higher and eventually drops 1%, forming a DOJI candle.
" Ok, even though it closed below my stop loss, I will just bear with it because it is only 1 cent below it. Furthermore, the candle forms a DOJI and it will likely to rebound soon."
Day 13, a quiet day...price forms another DOJI. Paper loss = 6%
"See, it is forming another DOJI, this is the sign to rebound. I think skipping the cut loss by bending the rule a bit is a wise movement. After all, we human are supposed to be flexible :)
Day 14
Selling momentum continued...The stock slump by another 7% with volume higher than yesterday, even at 3 pm
"Err... cannot tahan anymore. I just sold and close all my position with a loss of 13%. Next time, I will realize profit first to prevent the price turning against me. Also, I should have stuck with my stop loss to prevent further losses of 7%."
******************************* Part 2 *********************************
Day 15
Stock B just broke out from the base and hit 3 months high. Based on the pattern, the projected target price will have 40% upside. I will trade this based on momentum and break out. Enter today.
"This time I will never let the profits turn into losses."
Day 16
Stock B continues to trend higher. Paper profit = 5%
"Yes, the market is with me.
Day 17-20, Stock B consolidated around Day 16 price...paper profit = 4.5%
"Alright, be patient. it is still consolidating and I am in the profit."
Day 21, Stock B drops below Day 20. Paper profit = 4%, at 3pm.
"I won't let profits turn into losses AGAIN. I will sell now and lock in the profit. Realized profit = 4%
Day 22, Stock B continues to slide further a bit.
"I knew I was right, haha."
Day 25, Stock B forms a hammer.
Day 30, Stock B breaks Day 16's high.
Day 45, Stock B has been trending higher, slowly.
"Ouch, if I didn't sell too early, I could be sitting on paper profit of 20% now. Murphy's law always plays on me"
*************************************************************
The above are possible scenarios happened to us or perhaps some of us can relate a bit?
So what do we do after we enter a trade? After the entry, we will need to manage the trade.
Case 1: Did not realize profit earlier and profit turns into losses
The reality is we won't be able to predict the market. So, we will never sell at the highest or pick the absolute bottom.
Rather we can only anticipate and react accordingly.
Still, having a trading plan and execute accordingly are the keys.
Before we enter a trade, we will have set a proper stop loss position in order to work out the lot size. Stop loss should be set at a point where it violates the bullish structure
You can refer http://klse.i3investor.com/blogs/candlestick/113061.jsp for more information about position sizing.
With proper position sizing, we will not worry about having excessive risk exposure for a specific trade.
When you have a proper stop loss in place together with the right position sizing fitting your risk, you are in good hand no matter how the trade turns out since your downside has been protected.
So, if the price U-turn and hit your stop, move on and find a better trade. The reason we must have a stop loss in place is to prevent the price move against us. Remember, we won't be able to predict how the market move but to anticipate and react according to our trading plan.
However, if we face this kind of scenarios often, we will need to review our trading journal carefully - http://klse.i3investor.com/blogs/candlestick/113821.jsp so that we can find out if there is anything wrong with
1. the entry setup (break out? pull back? candlestick? Location of support/resistance?)
2. The stop loss (too tight?)
That's how a trading journal can help us to grow as a trader. Fix up our mistakes and leverage on our edge.
Case 2: Sold Too Early & Missed To Join The Super Bull Trend
Some people are paranoid and anxious once they are in the trade because they do not know how to manage the trade onwards, just like part 2 of the story above.
In this case, a trading plan - http://klse.i3investor.com/blogs/candlestick/114110.jsp is critical.
Once you have your trading plan done, you will have your exit price and stop loss in place. Again, I will need to emphasise that stop loss should be set at a point where it violates the bullish structure.
Let's take a look at JHM (past analysis --> http://klse.i3investor.com/blogs/candlestick/112318.jsp) as an example below:
The green circles, as shown above, are 3 possible entry for JHM in the last 2 months since Nov 2016. The red rectangles are possible stop loss corresponds to the each entry.
In my past analysis, I specified three target price, 1.86, 2.00 and 2.30. So, JHM actually closed at 1.86 today, which hit my first TP. What do I do?
For me, I have taken partial profit at TP 1 (1.86) because I am still bullish on JHM and believe it will hit my TP 2 and TP 3, I will consider taking profit according to my target price TP 2 & 3 should they fulfil.
What if JHM keeps running up, let's say to 3.00 by the end of the year? If I sold all my holdings at TP 2 and 3, I will be missing out a big chunk of the profit!!!
One way to ride on the trend is to adjust the stop loss upwards to protect the profit. Let's say when I first entered the trade at the first green circle region when it broke out from the resistance, my stop loss will be at the first red rectangle. My intent is to ride the trend up to the top until it turns bearish.
So, I will be moving my stop from red rectangle 1 to red rectangle 2, then to red rectangle 3 today. When the price hits my stop loss, I am out. Else I will keep riding the trend.
To digress a bit, if we enter at green circle 2 based on the breakout of the neckline, it is essential not to move your stop loss back to or too close to the neckline too soon as you can see that the price did back test the neckline (also went a few cents lower). If you did, you will be easily stopped out and the price keeps trending higher after that. This is a very common situation after the breakout.
For breakout traders who entered today, it will be safer to put your stop lower rather than just below the triangle.
Back to the topic, there is still a risk that the price will go against me and hit my stop loss then carry on the uptrend. So, that's why I have taken partial profit at my TP 1 and will continue to ride upwards to TP 2 and possible to let the last chunk to ride the trend until it turns against me.This will make my trading psychology much better when the price goes against me.
Or you can
1. To take partial profit when the price hits your target. (i.e. sell 50% of your position to lock in profit)
2. To use a trailing stop to ride on the trend with the rest of your 50% of your position.
Two scenarios will happen from here on:
1. The price pulls back deeply and hit your trailing stop. So, you will end up to earn less or at least break even depending on your trailing stop position for your 50% of your position. The good thing is at least you have realized the profit by exiting 50% of your position.
2. Price keeps trending higher and you adjust your trailing stop higher to protect your profit. Eventually, the price will retrace and hit your trailing stop and you will gain more profit for the rest of your 50% position.
This is what I normally do for trading to cope with the "sell too early" issue and balance my psychology. You can decide on how you want to manage your trade as long as you are comfortable with your decision.
Hope you enjoy this post. Leave me a comment below and let me know what you think.
Happy Chinese New Year!
恭喜发财， 万事如意， 新年快乐 :)
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Discussions
3 people like this. Showing 6 of 6 comments
forget all that.
who has ever become rich, I mean really rich trading shares as opposed to finding a really exceptional company to invest in?
2017-02-02 19:48
up a bit you already want to sell 50%
up a bit more, all gone....trailing stop even worse.
trailing stop means you sell into the slightest wind.
How to be rich? really really rich?
when all gone, you go look for another company.
the dog chasing its tail. Never ends and if lucky, goes no where.
2017-02-02 19:53
Have there ever been a super investor who fall into the traps of random / temporary fluctuations?
They all have their own opinions well before the random fluctuations, not just react to them except to take advantage of random fluctuations.
2017-02-02 21:30
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AllWin
Spot on. I like your idea of adjusting stop loss.
2017-01-25 22:59