Ask Colin

In your article in the September 2001 issue of Shares Magazine you illustrate several wonderful examples of charts that have trended strongly over long periods. In some of these, however, the trend line at a point in time would have been broken. Each of these then continued onward and upward but, would you have sold out about the time the trend line was broken and bought back again later as they resumed trending ? If not, ie you would have stayed put, how does one know that the price reversal below the trend line will not continue downward and wipe out your profits?

Firstly, trendlines do not form part of my approach to managing a trade. Trend lines are a derivative indicator that shows the speed of price change. That has its uses, but is usually obvious without drawing trendlines. Rather, I trade the trend itself directly from the price chart in terms of peaks and troughs, using the basic definition of trends.

Secondly, whatever method is used, we will sometimes be thrown out of a trend during its course. This is part of the nature of trading and investing unless we are long term buy-and-hold investors. For this reason, my trading plan has tactical rules for when to consider re-entering a trend that has reasserted itself.

Of course, it all depends on your trading or investment approach. A long term investor would look to stay in such a stock as these as long as possible. However, an active trader might want to get in and out on each upleg. A day trader will be in and out as often as you change your undies.

If you wish to use some kind of indicator the trade big trends like these, a long term moving average is a better tool than a trend line. Using the direction of a 260-day exponential moving average, you would have stayed the whole course to now in SCL. You would have been shaken out of HVN in 1996/97, but got back in and still be in. You would have also been shaken out of MRL briefly last year, but have gone back and stayed there.

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