Original subtitles

Stop loss.

In this part of the course, we are going to look at how to set the stop loss

location. We have mentioned this previously, but now we will study it in

with a discussion of all the different options for managing it.

First of all, we must understand what a stop loss should represent when it comes

to forecasting our scenarios.

Apart from minimizing our monetary loss, the key to the stop loss is that it

warns us of a change in the market sentiment.

For us, the stop loss should be executed at that point where the idea we are

trying to confirm becomes invalidated.

The location of the stop loss can be managed from two points of view.

From the point of view of our entry trigger becoming invalid, and from the

of view of our scenario becoming invalid.

In terms of the entry trigger, the location of the stop loss is not much of

mystery. I always recommend placing it at the opposite end of the candlestick

showing intent, used as an entry point.

Generally, this type of stop loss is recommended for day trading, since the

structures are similar and there is hardly any room for maneuvering between

invalidation of the trigger and that of the scenario.

They usually happen at the same point.

When the pattern is well defined and its behavior matches one end of the price,

then normally the opposite end of the entry candlestick will represent the far

end of the pattern.

For example, as we see in the slide, when going long, the opposite end of the

2, and 3 candlestick triggers is that of the candlestick showing bullish intent.

Meanwhile, in the case of going short, in the two -candlestick trigger, two

locations could be considered, one on the candlestick in question and the

on the set of candlesticks as a whole.

Moreover, when the price action has a longer duration, such as in a fast

or a complete structure, we will usually be able to identify two potential stop

-loss locations.

The first, more aggressive, on the other side of the trigger candlestick.

and the second, more conservative, on the other side of behavior as a whole.

If you want to adopt a more conservative profile and move the stop loss

significantly further away, you will have to decide whether the trade

to present you with an adequate risk -reward ratio.

In terms of ratios, we know what the ratio of the estimated profit against

possible loss tells us.

To calculate it, we need to measure the distance between the entry level and the

stop loss level.

That distance will represent the risk.

Then, we need to measure the distance between the entry level and the take

profit level and calculate the ratio with respect to the risk.

If the distance between the entry and the profit is twice the distance between

the entry and the stop loss, the risk -reward ratio of the trade will be 2 to

There are many traders who would not take a position that represents a ratio

less than 1.

My point is that this makes sense if we have somehow statistically quantified

this hypothesis.

But in a trading approach like ours, where the location of the orders will be

determined by the behavior of the market itself, it doesn't seem to make much

sense. There will be occasions in which you have a ratio of 0 .9 and others in

which the same trading zone offers you a ratio of 2 to 1.

By this, I mean that I do execute trades with a ratio of less than 1 if the

opportunity warrants it.

The location of the stop loss in accordance with the scenario is

on those structures that have had a longer time to develop.

and that are not so exposed to the short -term momentum.

These types of structures could offer several opportunities to enter before

start of a market reversal that we are waiting for.

An entry trigger might appear that ultimately does not have the expected

but the scenario would still be valid.

This is the key.

In this type of structure, our approach is not necessarily invalidated because

the trigger candlestick has not worked.

A new trigger could reappear later and the scenario would still be relevant.

As with the concept of entry by context, the general context is more significant

than a particular action.

All significance of the previously seen signs should be prioritized over and

above the trigger candlestick.

Look at what happens in this example. We see all the signs we would expect for a

potential accumulation and on trading zone number 6, a continuation outside

range looking for the test after the breakout.

The price leaves us a millimetric entry trigger on the area, so we should

establish our entry order here.

And then what happens is that the market needed more time to consolidate before

generating the effective imbalance.

If we had placed a very tight stop loss with the trigger in mind, possibly that

little false breakout afterwards would have ejected us from the position.

Even if this were the case, would the scenario be invalidated at that point?

No. As we already know, the scenario... which is determined by the context and

the roadmap, would continue to be valid at least until the price re -enters the

range again.

Even after that, the situation could be salvaged, but this would be the initial

element that we would need to see in order to assess the possibility of

accepting that the bullish scenario had been invalidated.

I recommend, if possible, that you use these two types of stop loss

simultaneously.

A certain percentage of the position could be placed at the opposite end of

candlestick showing intent, and the rest of the position could be closed using a

stop loss in accordance with the scenario, because while it remains

might always be the possibility that we might be successful with the movement we

expect to take place.

Therefore, the location of the stop loss in accordance with the scenario usually

has, by its very nature, greater amplitude.

At what point exactly should we place this type of stop loss?

Well, at the point where the context and the roadmap that we were postulating

become invalidated.

And remember, the invalidation of the scenario could activate a roadmap in the

opposite direction.

Let's continue with the previous example.

Suppose that, for whatever reason, the market experiences a lot of selling

activity.

Since we are above the trading zone and it begins to fall, if we know that the

re -entry into the range could establish a change in the roadmap, The stop loss

number 2, in accordance with the scenario, should not be placed too far

this point.

The price and volume chart alone may not give us a reference point for the

location of this second stop level, so we should use logic and not place it too

far away.

The market then fails and hits our stop loss number 2.

What are we looking at that point?

Well, at that point, the re -entry into the range and the potential upthrust

behavior are already evident.

With this as a base, we can begin to assess the possibility that the context

changing and begin to activate the bearish roadmap.

And we know what potential trading zones this roadmap might present us with.

In this case, we would look for a possible test after the upthrust and we

assess a short entry at a candlestick showing bearish intent, like the one

marked in the image.

This would leave us with two possible stop loss locations.

The first one just above the high of said candlestick and the second further

which we would take as a definitive signal that invalidates the bearish

scenario. Why would we place stop loss number 2 at that point?

Well, because looking at the market at that point again, the scenario in the

opposite direction, in this case upwards, is reactivated once again.

It is a very similar situation to the one we saw in previous modules when we

looked at the appearance of the movement with the opposing structure.

In this case, it has lost the trading level and has temporarily re -entered

range. but it later has the capacity to get out of it again.

We can objectively no longer consider ourselves to be engaged in the previous

sideways movement and therefore we could reactivate the bullish scenario.

In this case, we see how a bullish candlestick appears just as the price

performs a test of the trading level.

An entry at that point would leave those two stop -loss locations, the first

based on the trigger and the second based on the scenario.

The rationale is always the same. We will use one stop loss for the

or rejection of the trigger candlestick and the other stop loss for the

invalidation of the entire scenario.

As I said before, if both types of stops can be used together, so much the

better. Going back to the example we saw earlier, here we see a situation where

a single stop loss would be evidence of both the invalidation of the trigger and

the scenario as a whole at the same time.

If the market had hit the stop loss, it would already be below that small

structure at that point, and our rationale there would be that a

pattern might be taking shape.

If we have enough of a flexible mindset and manage to keep our cool after taking

the loss, we might reassess the situation to see if we can see enough

suggest that the market is likely to move in the opposite direction.

Just as I introduced an advanced concept regarding the entry with the concept of

the entry by context, I will now present another advanced concept regarding the

stop loss, which is what is known as a mental stop loss.

This concept should only be used by highly experienced traders as it

huge composure and commitment.

It basically involves not launching a stop loss order on the market, being

aware of what we want to see before manually exiting the operation and

the loss.

Although it may not seem like it, it is actually the best way to assess the true

change in the market sentiment, although at the same time it could lead to a

significant monetary loss in the event of a worst -case scenario.

Imagine that we find ourselves in this situation, a trading zone where we were

looking for the test after a bullish breakout and our trigger appears, so we

enter the market and place the stop loss just below.

And what happens next is something that has happened to all of us, and on more

than one occasion.

which is that the market falls and the price hits our stop loss.

But before the candlestick closes, it reverses the entire movement and the

starts to trade back above the trading level, something like this.

And of course, we look like fools.

Had it not been for the stop loss, we would still be in the market as the

scenario would still be intact, regardless of that last action.

And this is the key in this type of stop loss.

It is about limiting the risk that occurs in situations where at the end of

behavior, the initially predicted scenario is still valid.

Seeing that bearish breakout candlestick, which ultimately ends up as

candlestick, would even denote greater bullish strength.

The problem occurs when the market really has changed its sentiment and

to turn sharply in the opposite direction.

Imagine that we are in that situation.

When and where are we going to close the position?

One way to manage the situation is to wait for the candlestick to close and

automatically place the stop loss just below its end.

By doing this, we first definitively establish the risk limit for exiting the

market in the event of a change being confirmed on the roadmap.

But on the other hand, we still give the market a second chance in case it ends

up being another false breakout that develops over more than one candlestick.

It is an alternative way of managing risk that could salvage some operations.

The most negative aspect of this type of management is that the candlestick

aligned in the opposite direction, whose close we are waiting for to launch the

stop loss order below it.

It is quite simply a huge candlestick and has traveled a great distance, in

which case we should have an alternative plan if we want to use this type of

management. A plan B could be that this mental stop loss be placed at a point

far enough from the trading zone to prevent us from being ejected in the

of behavior like what we have just seen.

But that limits the risk in the worst possible scenario.

And if the worst possible scenario is encountering a candlestick like this, a

stop loss placed in the middle of the structure, for example, would be

sufficient and appropriate to the context.