Ask Colin

When looking at where to situate my stops on a weekly bar chart do I use the lows or the closing prices for the week or weeks?

The answer to this question is that it depends on the logic of your investment plan.

I use the lows, because this is the logic of my investment plan:

  1. I buy stocks that are making new 52-week highs or are already trending up.

  2. My expectation is that an upward trend will unfold.

  3. My definition of an upward trend is a series of higher peaks and troughs.

  4. My definition of a trend failure is if the last trough in a trend is violated.

  5. The low of a trough is by definition the lowest low of any weekly bar in that downward swing.

  6. So, for a trend to fail, the price must fall below that low. I base my stops on that low because it is where the trend has failed and what I expected to unfold is no longer happening.

So, in order for any reader to answer this question, they need to think through the logic of their investment plan. To give a simple example: Tom’s investment plan may be that he buys a stock that is rising above a rising trend line. Clearly, what Tom expects to happen is that the stock continues to rise above the trend line (however he defines a trend line, and there are several possible definitions). Then Tom must define what he understands is a break of the trend line. In the simplest case it may be that Tom regards any transaction that takes place below the trend line is a break of the trend line. However, it may not be that simple. Many investors use filters in this situation. Some possible filters are:

  • The stock must close below the trend line.

  • The stock must close one or more days below the trend line.

  • The stock must trade for an entire day, or week, below the trend line.

  • And so on…

So, Tom must define what for him constitutes a trend line break and that will answer his question of whether to use the close, the low or the range of the bar as his signal.

Again I have probably annoyed some of my readers by not answering a simple question, but pointing out that each reader needs to think through the application of the question in the context of the reader’s investment plan, which is likely to be and probably should be different to mine.