A long black candle failing as a short signal

As with long white candles, and any candlestick patterns for that matter, long black candles don't always work out perfectly. Long black candles do fail, as you can see in Figure 5-20. In fact, this figure includes two instances of long black candle failures!

Figure 5-20 contains a chart of the futures contract trading on crude oil from the summer of 2007. If you were involved with any oil or other energy-related commodity trading during that time, you'll remember that shorting was a hard row to hoe then.

Two long black candles appear in Figure 5-20. Both fail. One crashes and burns after a few days, and the other follows suit the very next day. For clarity's sake, I labeled them #1 and #2:

1 Long black candle #1 was followed by an up day, but this up day didn't break resistance or the high of the signal candle. It managed to stay below resistance for a few days before breaking out and then trading higher for several days in a row. Note that if you didn't get out of a short position on the day that resistance was broken, you never had a shot to get out at that level again. Without a protective buy stop at the failure level, your losses would've continued to pile up.

1 Long black candle #2 doesn't work out too well either, but at least it failed quickly. The possibility for a successful trade was clearly over at that point, and if you were involved, you could've moved on to the next trade. The trait that #2 shares with #1 is that if you didn't exit when the resistance level was violated, you basically didn't have a chance to get out at a lower level to limit your losses. Your losing trade would've just gotten worse. Getting out of trades quickly is just as important as finding and executing winning trades.

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