Ask Colin

Questions on the Trendlines column in Shares magazine December 2001 (complex question)

Questions on the Trendlines column in Shares magazine December 2001

With regard to CST the price at Friday's close was $3.00 but the 22 days EMA was $2.60 so are you saying that a buy should be put in at $2.60?

Yes. One technique I use is to place orders near the 22-day EMA. I will not always get a fill, but the idea is to try to buy at fair value. Please note that you are misquoting me in saying "at" the EMA. I said "near" the EMA. Depending on how much latitude I want to give it and whether that latitude is above or below the EMA, I may or may not get a fill.

The other thing I must stress here is that I am not saying that anyone should buy near this price. I am only illustrating a technique. Whether it is a suitable trade for any particular reader will depend on their financial plan.

It looks as though the trough you mention is around mid October when the price was $1.40 - does this mean that the stop loss is $1.40 ?

I not only mentioned it in the column, I marked it on the chart. That actual low was $1.28. So, I would put the stop under that level, say at $1.25.

I also said that the stop would be moved up under each trough. The last trough now was a week ago on November 16 at $2.48. I would have my stop under that, say at $2.43.

Your comment - size of position - how do you calculate this?

You should have decided in your trading plan the maximum percentage of your capital you will risk on any one trade. Once you set your stop, you can work out your position size. Obviously the further the stop is from your entry price, the bigger your risk, so the smaller your position. Some of the key issues in money management are discussed at length in my article in Shares May 2000. There is also discussion in Ask Colin on my Free Access web site.

Is CST not over valued ?

This is outside the scope of the Trendlines column, which is to explore issues of technical analysis. I do not have a brief from the editor to consider issues in fundamental analysis and anyway the column does not give me space enough to do it.

I would prefer not to express a view on its valuation, because I have not done the work necessary to reach such a conclusion, it not having being required to comment on the chart. I leave it with readers to do their research before they act. However, you might like to reflect on my caveat in the column: I must stress that this is a speculative stock and therefore unsuitable for risk averse investors. However, for those who want to speculate with a small part of their capital, I will show how it might be played. Whether CST is a suitable stock for you and how large a position you should take must be left up to you, because I do not know your financial situation or trading plan. If you do not know the answers to these matters, you need to seek the advice of a licensed and competent investment adviser. I am not an investment adviser.