Ask Colin

In determining when a new significant trough has been established, do you wait for the price to surpass the previous peak, before raising your stop to a new level?

Your question said "the previous high", but I like to be specific in my terms. A high and a low I use to describe a bar. For trends, I use peak and trough. This cuts out some possible ambiguity as to what "high" means - i.e. the high of the last bar or the high of the highest bar in the last upswing.

 

The answer is that yes I do. The idea here is simple. A nice trend will unfold in a series of higher peaks and higher troughs. However, sometimes the peaks and troughs are formed in a somewhat tortuous process, so there are some false starts that do not turn out in hindsight to be the ultimate extent of the latest upward or downward move.

 

So, once the price moves above the last peak, I move my sell-stop up to just below the previous trough. I then await the formation of a new trough above my sell stop and then for the price to again rise above the last peak. As soon as it does that, I move my sell-stop up to just below the last trough. Hopefully, this process continues in a good trend, but if it does not, I will be stopped out of the investment.

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