Lessons › Why traders lose › Chasing the big candle
World 11 · Why traders lose · lesson 21 · level 2
Chasing the big candle
After a huge green candle the next move is neither a crash nor a sure thing, but a stop under the candle sits almost 3 normal candles away, so the usual size carries almost three times the risk.
In one line
A huge green candle, and you jump in at the top. We checked 919 of these on real data: the surprise is not the direction but the size of the risk.
Explained simply
A candle shows how far price moved in one time block; green means it rose. We checked 919 huge green candles, each over twice the normal size. Afterwards, price first rose one normal candle in about half the cases, and first fell one in 41%. Not a crash, not a sure thing. The real danger is the stop, your give-up price: under the big candle, it sits almost 3 normal candles away, so your usual size means almost three times your usual risk. And one time in three, price gave back the whole candle.
A worked example
An example: you usually risk $100 with a stop 1 normal candle away. Under a big candle the stop is almost 3 normal candles away, so the same size puts almost $300 at risk. To keep $100 at risk, use about one third of your usual size.
Mistakes to avoid
- Buying the top of a huge candle at your usual size.
- Putting the stop under the big candle without shrinking the size.
- Worrying only about direction, when the real danger is the far stop.
- Jumping on a big candle that was not in your plan.
Check yourself
After 919 huge green candles, what came first?
A rise in about half, a fall in 41%. Price rose one normal candle first in 49.7%, fell one first in 41.0%, and did both in one wild candle in 9.2%. Not a crash, and not a sure thing.
You buy at the top of a big green candle and put your stop under it. How far away is that stop, typically?
Almost 3 normal candles. The typical distance was 2.81 normal candles, almost 3, because the stop sits below the whole big candle.
What were the next 12 candles like after a big green candle?
Bigger: about 1.6 times normal size. They were about 1.6 times their normal size, against 0.97 after any candle. In one case out of three, price gave back the whole big candle.
You usually risk $100 with a stop 1 normal candle away. A big-candle stop is 3 candles away. At the same size, what is at risk?
$300. Risk = size × stop distance. Three times the distance at the same size is three times the risk: $300.
A big candle is in your plan, and the stop under it is 3 normal candles away. How do you keep your usual risk?
Use about one third of your usual size. Three times the distance at one third of the size is the same dollar risk. A stop inside the candle would sit in the wild swings that follow.
Goal of this lesson: Let an unplanned big candle go, or size a planned one so a stop under the candle risks your normal amount.