Ask Colin

Can a new significant trough occur before the price goes beyond its last peak?

The answer again is yes. I have three sell signals. The first one was described in the previous answer. The second one is when a peak forms, then the price slips back to form a trough higher than the one before the last peak. The ensuing rally then forms a peak that is lower than the last peak. If, and not until, the price then falls away below the last higher trough, I sell without waiting for my sell-stop to be triggered. The reasoning here is that a lower peak and a lower trough mean the trend has changed from upward to downward. As I am a trend trader, my investment has gone wrong and I cut losses, or take profit, quickly.

 

There is an important note of caution here. This is the trickiest of the three sell signals to identify. It is important that the lower peak be of a size consistent with the rest of the trend. Otherwise, it may only be a rally within a normal correction in the trend. What you do here is up to your investment plan. I am inclined when in doubt to await triggering of the usual sell-stop. However, it can be argued that we might better stand aside until things clarify, or maybe take partial profits.

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