Ask Colin

Do you keep holding a stock when it breaks out and then just goes sideways, or do you switch into another stock?



This is a really perceptive question. You will recall the last case study in my seminar. I showed you how I sat in just such a situation and it worked out well. Other times it eventually hits the stop and you get out. Generally, I let the trend have the benefit of the doubt and keep holding. What is happening is that a trading range is developing. It is not unusual for trends to be punctuated by trading ranges and still reassert themselves. In many cases this happens after a sharp move up and is a process of the market consolidating the gains before a further move up is possible. In fact, when a stock rises sharply and then trades out sideways to a longish moving average and then takes off again it is often a very good move.

That said, the problem is opportunity cost. As you rightly say, you could have your funds working somewhere else. I think this all comes down to judgement and the psychological factor of whether you find it easy to buy back if the trend does reassert itself. Many of us find this difficult and therefore find that waiting pays off.

Investors should be patient. Traders are different in that their time frame is shorter. Many traders use a time stop as well as a price stop to manage opportunity cost.

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