Ask Colin

I have trouble identifying what troughs are significant in an uptrend when setting my stop-loss levels. Can you help?

The best trends to trade are very orderly. Each rally seems to rise about the same as those before it and each correction retraces about the same distance. Also, each rally and correction seems to take about the same time as previously - i.e. the peaks and troughs are evenly spaced in time.

If you have a trend where it takes about six weeks between peaks and troughs and you get one that forms in one or two weeks, beware that you may be looking at only an intermediate move within a normal rally or correction.

The golden rule is to give the trend the benefit of the doubt while it is still above your last stop-loss. You have to risk something to harvest the big trends.

The other thing you can do if you are very uncertain is not to try to solve the problem by analysis. Solve it by acting to reduce risk in the face of uncertainty. Take some (say half) of your position off and await developments. If the stop-loss gets hit, sell the rest. If the trend turns out to continue, then buy the part you sold back again.

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