Ask Colin

How should I set stops for stocks that have risen very fast in a short time?

The detailed question was:

I am using 5yr chart with weekly settings using 52wk and 32wk exp MA ,but most times I have to go to a 3yr chart to actually pick the correct stop loss point. Is this an OK thing to do? For instance SRX and DMP have risen 50% in a short time ,where does one consider a stop loss then as there is a massive high but no significant low with 40% of the high. There are a number of stocks in this type of position, in other words fast rising stocks over a short periods of time.
I am using one of the Banks web sites to look at charts. Do you reckon these are good enough to do the job or do you recommend some better charting programs?
I have read you book and heard you talk. Lent the book to someone so am in the market for another.

There is an important problem I have with your question because you are asking with reference to two stocks that a reasonable person might assume you own. For me to comment on them to you would amount to specific advice for which I need a licence, or I am breaking the law. See the explanation of advice on the Ask Colin page of my website. The best I can do is to answer in very general terms. I have not even tried to find out the names of the stocks with the codes you quoted, my answer in no way refers to them specifically.

I think the questions 13. I am concerned about giving back a lot or all of my profit on good moves because the logical stop-loss is so far away. 20.. Any thoughts? and As an example, Boral (BLD) has been going up for a long time with no significant corrections. How does a long term investor pick a stop-loss level in such a situation? under the keyword Stops on the Ask Colin page on my website already address the issues you raise.

I have also very recently discussed a similar case on the members website in the stock investment journals for Ramsay Health Care.

These discussions are, of course about my investment plan. Your investment plan will be different to mine, so you will have to use what I do as a guide in thinking through your own approach to the problem. There is no single right answer in general or even for any one investor.

Of course, you may not be an investor, but a trader. In which case my investment plan may not help you much at all.

In principle, the way I teach the issue of stops is that a stop is where you are wrong. This is how you define that in general  terms:

  1. Before you buy a stock you must know what you expect to happen that will yield you a growing income stream if you are an investor, or make a capital gain if you are a trader.

  2. A general idea is not good enough, you must clearly define how you will know that what you expect to happen is happening.

  3. Then you turn that definition on its head, so to speak, and define how you will know if it is not happening.

  4. That is when you are wrong about your decision to buy the stock. Or later when you are wrong about your decision to continue to hold the stock. This is your stop.

That process is the same in these general terms for either an investor or a trader. It is basic for risk management, which is far more important than profit-seeking because protection of capital must always be the prime objective for an investor or a trader. Of course, there is more to investing or trading than risk management. You may also have a method to take profits before stops are violated.

You referred to my book and said you wanted to buy another copy. You can do that from my website. However, my book is about investing. If you are really a trader, and I suspect from your question that you are a trader (reason: you only talked about the price. That is a trader mentality. An investor would be concerned about the business and its ability to keep throwing off a growing income stream). If you are looking for a book about trading I strongly recommend Dr Alexander Elder’s book The New Trading for a Living. I think it is the best book about investing I have ever read. There is a review on the Book Reviews page on my website.

You also asked about charting. I have no idea of the quality of your bank’s charts. If you are not happy with them, try Yahoo Finance.     

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