When Chart Patterns Fail
I would like to think that if I am trading with these patterns I will have nothing but wins and no losses. But they do occur so we need to look at every trade not from how much we can make, but how much we can lose. When we found this stock it was just breaking out of a rectangular chart pattern. The top of the pattern was $17 and the bottom was $13.6. This gave us a potential move of $3.4 above $17. So our target was $20.4. The Stock is now trading at $17.3 which means that if we buy it now we would be expecting a gain of $3.1 or a 17.9%. That could be great, but too many newbie’s will stop here, thinking about nothing but the possible reward. What we also have to consider is the possible risk for placing this trade. We don’t want to just hold onto it if it starts falling. That could create a huge loss; to stop this from happening I will always place a stop order when I trade a chart pattern. This limits the amount I can lose on a trade and prevents me from taking a larger loss. So, where do we exit? Where do we consider it a loss and move onto the next trade? In general if the stock falls back into the pattern the chart pattern has probably failed and it is time to exit it, for a loss. The only problem is where is the best spot to place the stop? You don’t want to place your stop at $16.99 because the stock could come back hit $16.99 and then start going up again. Placing the stop too far down however could make you have too big of a loss. So most traders will disagree on the best point to cut your losses short, and you need to consider how much of a loss you are willing to take if you are wrong. Just for fun let us talk about a few of the most popular ways you set a stop. 1. 3% below Support If you are just getting started this might be something for you to consider. If you place your stop 3% below support it usually can provide enough wiggle room for the stock, so you will not be stopped out prematurely and miss the move. 2. 1% Below Support If you feel comfortable drawing support and resistance and want to take very small losses this can be a good alternative. Just remember you will be stopped out more often by placing such a tight stop. 3. Eye Balling it Some people may just want to pick a spot where they will cut their losses. If you do not trust yourself to do this or if you do not have much experience trading you might not want to use this. 
If you would have entered this stock when it gave us a buy signal at $17.3 and just held it without a stop you would still be waiting after a full year for it to give you some sort of a rally. The price today is $8.85. Even more of a reason to cut your losses short. |
