How to Handle a Squat Candle at Breakout Point
- Rohit Musale, CFA
- Mar 9
- 3 min read
What exactly is a squat candle ?
A squat candle is candle that attempts to break out of a base but,
eventually fails to close above the buy point by the end of the day.
What do you do then ?
You ask yourself a very basic question:
Did this candle do what I expected it to do ?
What were you expecting ?
You were expecting a high volume breakout candle that closes well above the buy point by the end of the day.
If you do not get what you expect, what should you do as a professional trader ?
Answer: Immediately go into risk management mode.
You do not react.
You choose to respond.
How do you respond ?
There are 3 basic ways to manage risk:
1. Reduce position size
2. Move stop loss up
3. Do both of the above simultaneously
As a professional trader, you must do at least one of the above on a squat candle.
And,
you have to do it just before the squat candle closes. (2-3 minutes before the close)
Why ?
To avoid overnight risk.
How else can you respond to a squat candle ?
One risky option is:
Do nothing.
When is this justified ?
Answer: Only when you have earned profits in your previous 4-5 trades combined.
That increases your ability and willingness to take risk.
As a professional trader, you first have to "earn the right" to take risk.
Why is it important to learn about the squat candle ?
Mark Minervini has introduced this concept of squat candle in his books.
He wouldn't make a special mention of the squat candle in his book unless,
he himself had faced this situation multiple times in his trading journey.
I myself, have come across the squat candle many times.
The best I can do is manage risk.
Closing the trade at the squat may not necessarily be wise.
Why ?
Because, the stock that you have chosen most likely met all or if not most of our,
Orange Trading System criteria.
This is a stock that is worth paying attention to.
I would not easily give up my position in such a stock.
How else can a squat candle be handled ?
When you buy a stock, there are usually atleast 1 or 2 moving averages between,
- your entry price
- your stop loss (7-8%)
They are
- 8 EMA
- 21 EMA
Sometimes I might choose to stay in the trade with full position if,
none of the above moving averages is broken.
When to stay and when not to stay ?
Let the risk management principles make the decision for you.
That is why I often use the word "sometimes".
There is no black and white in trading.
Its all conditional.
Your ability to handle situations like a squat candle can make you a world class professional stock market trader.
Put some thought into your risk management principles.
Appearance of a squat candle is not abnormal.
Can I stock continue on its uptrend inspite of the appearance of the squat candle ?
Ofcourse.
Can the stock break down and fail completely ?
It can.
Just learn to manage risk.
Regards,
Rohit Musale, CFA
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