Ask Colin

Please comment on Tomato Technologies (TMO) price movements, in particular what price indicators would you have used to generate a sell signal during that period, and at what point was that signal given?

There were several sell signals on this chart.

Firstly, just reading the bars themselves, the bar after the highest bar is the first downtrending bar for some time. It could have prompted a sale at the open on the following day. These basic ideas of trend are taught in E114 Technical Analysis at the Securities Institute (see my free access web site Ask Colin/Education). They are also dealt with in the Stockwatch series of articles on my subscription web site.

Secondly, There was a warning in the form of a gravestone doji at the highest bar. However, you would still have needed the next bar, because there had been a similar signal three days earlier, but the trend had continued higher after only a one-day pause. Usually we look for a follow through on a pattern that is not a reversal pattern, but only a warning of uncertainty. A gravestone doji is a candlestick pattern. Candlestick charting is taught in E171 Specialised Techniques in Technical Analysis at the Securities Institute, which follows on from E114.

Thirdly, The best indicator to use to get you out of fast moving trends is the Parabolic, as I have taught in one of the Shares charting articles on my subscription web site. The chart below shows the parabolic stops for each day as blue dots:

The Parabolic calculates a stop for the NEXT day, which is shown at the top left of the chart. So, it would have been possible to get out on the day second from the top not long after the open - It appears to have opened at the previous close, traded up then fallen through the stop. How much slippage you would have suffered depends on your speed in reacting and the liquidity of the market at that time.

You could have tried to use a moving average, but the problem was knowing what period to use for it in a fast moving trend.

It was possible to have used a trend line to get out of this trend. The obvious trend line through the lows of the bars would have been cut by the gravestone doji on the first day of trading after Christmas and prompted a sale next day on the basis that the doji was price confirmation of the trend line break. I have also shown that trendline on the chart for you.

Trend analysis in this time frame is using bars, not peaks and troughs. In fact it was rather easy to read this trend in that way, as described above.

The reason I do not use percentage stops is because the market does not care what percentage you can afford to lose. It is going to form patterns based on the behaviour of all market participants. Stops are usually used to reduce risk. However, percentage stops can act to increase risk. To understand this, consider a chart with a clear support level at 88. It rallies to 100 and a trader decides to apply a 10% stop - i.e. at 90. The market could trade down to 90 and take our trader out, then carry on falling to 88, find support again and then rally to new highs for the trend. By setting a stop above support, the trader has INCREASED the chance that he will make a loss on the trade.

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