Ask Colin

How should stops work on downward breakouts where there is no prior trend?

The detailed question was:

Let's assume that price broke out of broad trading range. This is your buy signal. Then price did not form an up trend, instead it formed a reverse pattern (eg. double top) and finally "made lower peak and then moved below the last trough". Is this your sell signal here or you prefer to wait till "lowest support level" - set just below broad trading range is reached ? My confusion here comes from fact that there was no up trend in a first place so there is no logic in talking about trend ending. From other point of view reverse pattern and end of trend is quite clear.

If I am quite sure that the price has started to trend down, I would sell before it hit my stop-loss below the trading range. However, this does call for some judgement with respect to time frame. Sometimes a correction can take a the form of a move down in a couple of steps, which looks like a down trend - and is in the short term. I find this is often a difficult decision. When I am unsure, I tend to give it the benefit of the doubt, knowing the stop-loss will still only result in the loss of a small fraction of my trading capital.

It is also extrememly important to know your time frame. As an investor, the weekly chart is my time frame and I do not watch or act on daily charts, because signals there but not on the weekly chart are trading signals, not investing signals.

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