The candle that closed back inside was never a break
You get stopped out, then price runs to your target without you. That has a mechanical cause and a mechanical fix. The fix costs you something honest, so here is how to price it.
Your stop was at the level, and the wick took it
You get stopped out at 10:14. By 10:22 price is trading exactly where you said it would go. The level held. Your position didn't.
One candle poked through your level by a few cents. It filled your resting stop at the worst tick in the range. Then it closed back inside. On the chart afterwards it is a wick, and in your account it is a realised loss.
Near a good level, that spike is often deliberate. Resting orders sit just beyond obvious support, and price runs down to collect them before turning. Nobody publishes a schedule for it. Look for the footprint: a long tail, thin volume in it, and a close on the correct side.
The close is what the market agreed on for that period. The wick is what it tested and rejected. Your stop rule decides which of those two you trade on.
Let a close beyond the level trigger the stop
Write the stop as a close, then say which close. A stop that reads "below 512.40" is ambiguous. A stop that reads "a 5-minute close below 512.40, regular hours" can be checked by anyone. Including you at 10:14, with your hands shaking.
Three details make it usable. Pick the timeframe you entered on, so a 5-minute entry gets 5-minute closes. Require the candle body to finish beyond the level rather than touch it. And settle all of it before you are in, because after entry every rule becomes negotiable.
Where the level is a zone rather than a line, the close has to land clearly outside the zone. Inside the zone you have no information, so you are waiting. Nobody can tell you exactly how wide a zone is allowed to get. That is a judgement call you make while drawing it, not one you make while a candle prints.
Every version of this rule costs you something
A resting stop order at the level guarantees the wick takes you out. It also guarantees you are out when your connection dies. Same when news hits while you are refilling coffee.
A mental stop protects you from the wick and exposes you to yourself. The workable setup uses both, at different distances. An alert at the level, so you are watching. A mental stop on the candle close, and a hard order further out as the disaster stop.
Say your level is 512.40 and you enter at 512.70. Your close-based stop is worth roughly 0.30 of risk in normal conditions. Put the disaster order at 512.05, which sits 0.65 away. You now have room for a 0.35 wick and a hard floor if something ugly happens.
The catch is real. On the days the disaster stop fills, you lose more than double what the close-based stop would have cost.
Size the position off the disaster stop
Your size comes from the widest stop you are actually willing to honour. Size for 0.30 of risk, then sit through a 0.65 move, and you took double the loss you planned.
Run it the other way. Decide the dollar risk first, divide by the disaster distance, and that is your size. Risking 200 dollars with a 0.65 stop on stock gives you about 307 shares.
The same 200 dollars with a 0.30 stop gives you 666. Same account, half the position. The difference buys you the right to sit through a wick.
For options the arithmetic is messier, because the contract does not move one for one with the underlying. Use the stock level as the trigger and the premium as the sizing input. Work out how many contracts you can hold through the full move to your disaster level. Buy that many.
Run this before you place the stop
Do this while you are writing the plan, before the position exists. Once you are in, the wick will make a persuasive case for changing your mind.
- Write the exact level price before you enter
- Name the timeframe whose close will trigger the stop
- Require the candle body to finish beyond the level
- Set a price alert at the level so you are watching
- Place the hard disaster stop wider than the close-based stop
- Measure the distance from entry to the disaster stop
- Divide your dollar risk by that distance to get size
- Check the target still pays twice the wider risk
- Tag the exit reason when you close: wick, close, or target
- Review the week for stops price recovered within two candles
Frequently asked questions
No. A level breaks when a candle closes beyond it on your chosen timeframe. A wick through, followed by a close back inside, tells you the level was tested and held.
The one you entered on. If the trade came off a 5-minute chart, use 5-minute closes. Borrowing a slower chart for the stop turns a small loss into a large one.
Not safely. Without eyes on the chart you need a resting order. A wick will sometimes take it, so size smaller and accept that cost.
Replay the stop on TraderLog's chart
Open a trade and TraderLog marks your fills on a TradingView chart. You can see whether a candle closed beyond your level or a wick just clipped you. Fills come straight from Schwab, IBKR or a CSV, at the times they happened.
Every trading morning at 8:40 ET our model draws the SPY, QQQ and IWM zones it expects to matter, on a TradingView chart, before the open. Where price reaches one, it has turned 74 percent of the time. Free, no account. See today's map