The long white candle failing as a long signal

What happens when the support level revealed by a long white candle is broken? Take a look at Figure 5-4. This chart shows a nice long white candle and then a quick violation of its support level. The failure of this stock to hold support means that the long white candle on the chart doesn't mean bullish action is going to continue!

Figure 5-3:

A long white candle followed by a nice buying opportunity.

Figure 5-3:

A long white candle followed by a nice buying opportunity.

Figure 5-4:

A chart showing the failure of a long white candle to hold support and the resulting price action.

Figure 5-4:

A chart showing the failure of a long white candle to hold support and the resulting price action.

How do you cope with a failed signal? Take preemptive action. Place an order that triggers when a signal fails. This process is known as a stop order. When you're trading long, stop orders are known as sell stop orders or sell stops. A sell stop is placed below the current market price of a stock and triggered when the price reaches this level. For example, if a stock is trading at 51, you can place your sell stop order at 50. As long as trading stays over 50, nothing will happen. However, once the price hits 50, a sell order is executed, protecting you against further drops in price. Use stops when initiating positions to minimize the damage caused when a signal turns bad.

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