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Stop loss.

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

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

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

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

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to forecasting our scenarios.

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

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warns us of a change in the market
sentiment.

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

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trying to confirm becomes invalidated.

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

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

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of view of our scenario becoming
invalid.

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

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

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showing intent, used as an entry point.

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

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

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invalidation of the trigger and that of
the scenario.

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They usually happen at the same point.

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

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

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end of the pattern.

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

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

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

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

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on the set of candlesticks as a whole.

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

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

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-loss locations.

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

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

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

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

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to present you with an adequate risk
-reward ratio.

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

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possible loss tells us.

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

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stop loss level.

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That distance will represent the risk.

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

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

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

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

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

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less than 1.

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

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this hypothesis.

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

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

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

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

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

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opportunity warrants it.

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

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

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

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These types of structures could offer
several opportunities to enter before

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start of a market reversal that we are
waiting for.

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

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but the scenario would still be valid.

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This is the key.

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

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the trigger candlestick has not worked.

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

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

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than a particular action.

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

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above the trigger candlestick.

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

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

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range looking for the test after the
breakout.

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

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establish our entry order here.

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

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generating the effective imbalance.

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

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

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

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

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

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range again.

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

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

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accepting that the bullish scenario had
been invalidated.

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

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simultaneously.

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

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

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

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

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expect to take place.

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

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has, by its very nature, greater
amplitude.

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

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

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become invalidated.

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

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opposite direction.

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Let's continue with the previous
example.

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

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activity.

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

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

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

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this point.

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

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

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far away.

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

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What are we looking at that point?

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

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behavior are already evident.

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

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changing and begin to activate the
bearish roadmap.

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

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

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

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marked in the image.

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This would leave us with two possible
stop loss locations.

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

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

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

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

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

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

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

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

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

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

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sideways movement and therefore we could
reactivate the bullish scenario.

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

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performs a test of the trading level.

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

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

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

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

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invalidation of the entire scenario.

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

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

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

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the scenario as a whole at the same
time.

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

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

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pattern might be taking shape.

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

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

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

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

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

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

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

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huge composure and commitment.

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

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

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the loss.

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

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

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

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

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

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enter the market and place the stop loss
just below.

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

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than one occasion.

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

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

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

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And of course, we look like fools.

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

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

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

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

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behavior, the initially predicted
scenario is still valid.

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Seeing that bearish breakout
candlestick, which ultimately ends up as

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candlestick, would even denote greater
bullish strength.

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

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to turn sharply in the opposite
direction.

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Imagine that we are in that situation.

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When and where are we going to close the
position?

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

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automatically place the stop loss just
below its end.

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

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

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

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

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

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

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

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stop loss order below it.

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

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

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

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

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of behavior like what we have just seen.

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But that limits the risk in the worst
possible scenario.

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

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

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sufficient and appropriate to the
context.