Ask Colin

What do you do when a stock stagnates for maybe weeks or months between a breakout buy signal and a stop-loss level?

This is a very good question. It does not have a simple answer, because it will depend on your trading plan. My approach to this type of situation is to be patient and hold it until I either get a signal to sell, I find what I think is a better stock to switch into. My trading time frame is weeks to months to years if the stock stays trending up. Many stocks that form long-term uptrends only move a few times a year in anticipation, or in response to, news or profit reports. I find that it pays to be patient with many of these stocks.

However, your trading plan does not have to be the same as mine. Many traders solve the problem that concerns you by having a time stop as well as a price stop. So, they may decide that if a stock has not moved as they expected within a week, or a month or whatever, that they were just as wrong about the trade as they were if the price stop was hit.

Lack of patience is a problem for many traders. The only way you can assess this for yourself is to keep a trading diary that tracks not only what happens to your trades, but what would have happened is you had not switched from one stock to another. Interestingly, the research on this in the US shows that most of the time when an investor switched, the stock he bought did not do as well as if he had stayed with the original stock.

One reason my trading plan is as it is rests on the problem of transaction costs. The more we switch around, the better we have to be at trading to generate a higher return in order to overcome transaction costs.

Another reason is taxation. For those who are trying to be taxed as investors rather than traders, the more trades they have that are held over 12 months have a distinct tax advantage.