Ask Colin

Is your sell stop triggered by an intraday violation of your stop level or by a close below your stop level?

My investment plan calls for me to exploit an upward trend.


An upward trend demands that each trough in the trend be higher than the last one (with up to 2% slippage).


Each trough is determined by the lowest price in the swing down, which means that my sell stop will be triggered if an intraday low violates it.


However, you should understand that this is my method, based on the logic of the definition of a trend.


Nevertheless there is no right or wrong method. There is an argument that the advent of automatic stops in our market sometimes results in waterfall declines on light volume as each sale triggers more stops. I am in two minds about this, but have yet to be convinced to change my plan.


This does not mean that I ignore the evidence and may look at the course of sales for that day to try to work out what may have been happening. Rules and guidelines are there to stop us doing what we want to do, but which is against the plan. On the very, very odd occasion that I have formed a view that the situation is unusual, I may give the stock a little more time. However, if the next bar starts to follow through on the downside, I will be out of there very quickly.


In other words, nothing which I do is unthinking and mechanical. However, I have had a lot of experience and believe I am very disciplined. It took me more than a decade to get to that level. Until you get to that level, I suggest you test your plan and then follow it mechanically until you have a good track record and develop a lot of experience.


It is better to sell one or two stocks too quickly and have to buy them back, than to ignore one sell stop and be badly burned.