Ask Colin

I think I read somewhere that you often require a share to "prove its case" by exceeding a previous high by 2%.

Yes, I have said something like that. However, it is really an unrelated issue to the first question.

 

I learned the art of investing before computers and used hand-drawn point and figure charts because they are so easy to quickly update hundreds of charts. One of the heuristics or rules of thumb that point and figure chart users adopt is to use a box size that is about 2% of the price. The signals those charts give is driven by the box size, in that a breakout is not recorded until the price has moved one box or 2% above the highest box in the congestion area or trading range. When I began using bar charts, the issue arose of what move constitutes a breakout. This was not my issue, mind you, because for me a move out of the congestion area is a breakout. Commonsense works fine. If it is only a fraction of a cent breakout on a $4 stock it is maybe not significant. However, no matter what I say there are always people who want rules set in concrete. So, if they insist on having a rule, I tell them to use 2% as the test for a breakout. It has nothing to do with whether the breakout will succeed or fail. It just gives them what they crave. As they mature as investors they will probably no longer need such a rule.

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