We all know how important is risk management and cutting loses on the stock market. One of the best tools, that can help us are stop loss orders. Stop losses are easy to use and effective. Nevertheless, a lot of investors don’t use them, forget to use them or think that they don’t need them.

How does stop loss order work?

It is simple. You place an order to buy or sell when the stock reaches certain price level. When the stop loss is ready, you don’t have to watch the stock price all the time. Your order would be executed automatically when the set price level would be reached.

For example - set your stop loss 10% below price at which you bought and you limit your loss to 10%.

The advantage is that you don’t have to monitor your stocks all the time. You will not lose more than you accepted to lose. You will not forget to sell, when stocks are going down.

When setting a stop loss, you must be aware that sometimes dynamic price fluctuations may occur and they can trigger your order. It is good practice to set price level a little below desired level to avoid such situations.

Where to set a stop loss?

There are different opinions and strategies. You can have your own loss level you accept and you always place stop loss based on this.

It is a very good idea to set a stop loss slightly below support levels (half of white marubozu body, certain SMA or EMA, trend channel border…). Very often, breaking out the support level indicates further movements in breakout direction, therefore it is a good place to close (open) the position.

These orders are especially useful for people who can’t dedicate whole day to watch the market. Then use stop losses and remember to set properly the period of time when your stop-loss orders are active.

photo credit: jebb

Doji is a candlestick with closing and opening prices equal or very close. Length of both shadows can vary.

When doji emerges on a chart it usually means that bulls and bears have similar strength and there is indecision, no clear direction for further movement. The longer shadows, the more indecision.

If doji appears in uptrend or after white marubozu, it can signal end of the movement in this direction. In a similar way, if doji appears after downtrend or after black marubozu, it signals possibility of changing the trend soon.

Although doji is very strong indicator, it is good habit to wait one or two stock exchange sessions and look for confirmation

There are two very specific types of doji, which are worth short presentation:

Gravestone Doji

Gravestone Doji has no lower shadow and long upper shadow. If gravestone doji is preceded by uptrend or white marubozu, it usually signals change in direction, because bulls tried to reach higher price levels, but were pulled down by bears to the opening price.

Dragon Fly Doji

Dragon Fly Doji is reversal to the gravestone doji. It has no upper and long lower shadow. After downtrend or black marubozu, it signals that bears’ domination was neutralized by growing bulls strength.

In both cases, it is good to wait one or two days for a confirmation of direction change.

In one of my previous post concerning investing, I made an introduction to Japanese Candlestick Charts. If you don’t know what values and how are represented on candlesticks, I strongly advice you to read that post.

If you are already familiarized with candlesticks, we can go on and today I will start a series of posts presenting candlesticks formations.

Marubozu is one of the most important Japanese candlesticks. This is single candlestick formation and we can distinct two types of Marubozu: white and black.

In general, Marubozu always has long body and doesn’t have shadows or shadows are very small. It means that white marubozu’s highest price (almost) equals closing price and lowest price (almost) equals opening price. Black marubozu’s opening price (almost) equals highest price and closing price (almost) equals closing price.

Color and length of the body tell us about the strength and relation between bulls and bears. If we get white marubozu, the bulls are in control; if black marubozu, then bears.

How can we use marubozu?

Marubozu as a signal of trend shift.

White marubozu on low price level very often is a signal to change the trend to upward direction. In such case white marubozu tells us that there is a price minimum and there is no resistance on the market to grow.

Black marubozu works analogically. On high price level, it signals change to downtrend. Bears start to take control and there is no resistance to go down.

S&P500. White marubozu starts uptrend.

Marubozu as a confirmation of support/resistance.

When white marubozu reflects from a support or a black marubozu reflects from a resistance, this is strong confirmation of that price level.

Microsoft. Two white marubozu’s confirm strong resistance - lower limit of upward channel.

Marubozu breaks support/resistance.

When white marubozu breaks resistance or black marubozu breaks support it is strong signal that the price would follow the direction of marubozu.

Apple. Black marubozu breaks support - 45 SMA

Marubozu as a support/resistance.

Middle of the marubozu’s body is very important price level. It is either support (white marubozu) or resistance (black marubozu).

Yahoo. Middle of black marubozu gives strong resistance.

Of course, keep in mind that examples described above don’t give you 100% guarantee of profit. They are very probable scenarios but you should always support yourself with other techniques of technical analysis. Even then, you don’t have 100% that you make a good pick.
Remember to use different methods and diversification. This way you can effectively minimize risk level and be a successful investor.

I trade on GPW (Gielda Papierow Wartosciowych w Warszawie – eng. Warsaw Stock Exchange) via my broker account in my bank. All my accounts (personal, saving, broker, fund supermarket) are fully integrated and easy to manage.

On my bank’s website, I found an interesting list of 10 most important and most quoted rules concerning investing. There is an English part of this website, but unfortunately page containing these rules is available only in Polish.

Below I listed them. These rules are very simple, but a lot of beginner investors don’t obey them.

1. Those who think they are smarter than the market, they feed it.
2. Never put all your money into one stock company, fund or even one type of funds.
3. Broaden your knowledge about the market.
4. Have your own opinion. Treat analysts’ opinions only as a support.
5. Be consistent in your actions.
6. Always establish how much you can lose.
7. Don’t try to make quick money. Investing is for patient people.
8. When media says there is a boom on the market, start selling your stocks.
9. Don’t try to catch peaks and troughs.
10. Never invest against trend.