Ask Colin

The real problem I am having is trying work out where to set a stop-loss for skyrocketing stocks where there has been little sign of a plateau or minor downturn.

With the greatest respect, I would like to suggest that you are tackling the problem the wrong way. Let me answer your question in two ways.

First, if a stock rises so far without any correction that you are uncomfortable with your sell stop, I think the best approach is not to try to tighten up your sell stop somehow. That could be inviting a normal market movement to take you out of a good investment. I think that your sell stop should be always where the logic of your investment plan says it should be. Then, if you find that the result is that too large a percentage of your capital is then at risk, the logical course is to sell your position down to a size where less of your capital is at risk. Say you started with a risk of 2% of your capital and the stop is now 4% of your capital away. It makes sense to me for you to halve the position. Remember that you can always rebuild it again later when the logic of your plan allows a closer sell stop.

The other way, and in many respects the better way, to answer your question is by reference to my investment plan as set out in my book Building Wealth in the Stock Market. The way I set my sell stop is only one of my three sell signals. My sell stop may be a long way away after a strong rise. That is part of the dictum to let your profits run. However, if the rise runs out of steam and the whole trend fails, I find that I am likely to get one of my other two sell signals well above the sell stop level.

I think that the answer to your question is a combination of these two approaches. Wait for a sell signal, but if you cannot stand the pain, sell down to a level of risk you can tolerate. Resist the temptation to tighten the stop in a way that is contrary to your established and tested investment plan.

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