Ask Colin

Many buy signals tend to fail in weak markets, so I am reluctant to invest. Any thoughts?

It is true that "all ships rise and fall on the tide" of the market. It is hard for even good stocks to make progress in weak markets. However, some of the strongest stocks will be ones that give a buy signal early on, in a weak market, before a good market move gets under way. Equally, in a weak market there are moves that can be generated just because markets are quiet and thin. Someone wants to buy, so they have to bid the price up causing a signal. However, nobody else agrees and there is no follow-through buying.

My own answer to this is to enter in stages. I will buy a small lot and then build on it if a trend develops, or sell out at a small loss if the signal fails.

The other main answer is to wait for the trend to be confirmed. This gives up some profit, but it may be less than the loss if too many of the signals fail.

Finally, another point that you have made to me is that it will pay to pick only the strongest quality signals in weak markets and only take those where the stop-loss is close enough to take much less risk than usual. The usual thinking is that it does not matter how far the stop is away from the entry price. A wide stop simply dictates a smaller position with the same risk in dollars and percent of capital. However, it may be possible to buy the ones with a close stop and take a position of a meaningful size with a much smaller than normal risk in dollar terms and percentage of capital