Ask Colin

In determining the break in an uptrend, should I use a 5% stop, or daily/weekly moving average cross over?

The article you refer to is not strictly about trend endings, but on the underlying mechanics of a bubble stock. However, trading this kind of stock often involves being very sure about the trend change and getting out with most of your profits intact.

The main method I use is basic trend analysis of the peaks and the troughs. There is a problem with this sort of stock, though. The last stage may be so steep that there is little to base the traditional method on. Most commonly, I would get out when a stop placed under support is hit and this will tend to be before my other exit signals based on trend are activated.

The other technique that I use in fast moving stocks, is the Parabolic SAR. However, this is not really what you are asking - about trend endings - because there is not necessarily a trend ending involved, but it is a useful stop-loss method.

The other methods some people use are trend lines and moving averages and your reference to crossovers implies use of one of these techniques. These are not my tools of preference. For investment grade stocks, I find a 260-day exponential moving average is a useful subsidiary tool, but it would be far too slow for a bubble stock. A short term trend line is, for me, the most logical in a steeply rising stock and tends to give even earlier signals than the Parabolic. However, it is not a tool for trend endings, just to get you out near the top of a really steep move.

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