Ask Colin

When setting an initial stop-loss level under an accumulation or consolidation area, should it be under the lowest low or the last trough?

This is easiest to answer when the accumulation area (value model) or consolidation area (growth model) is a nice even rectangular shape. Then, I would tend to use a stop-loss level under the lowest low of the area.

The exception may be if the area was very deep - say 50% of the high price of the area or more AND the price was clearly trending before it broke out of the area. Then I might place my stop-loss under the last trough in that trend. This is tricky though. It is easy to get you time frame wrong and put it under a trough that is in a short term trend, so it requires judgement and experience. If in doubt, use the lowest low and go with a small position size until you see a trend develop above the area, when you can add to your position on rises from troughs or new highs.

When the accumulation or consolidation area is not nice and rectangular, you may have to have resort to the last trough. However, this again requires judgement and experience to get the time frame right as discussed above.

This is easiest to answer when the accumulation area (value model) or consolidation area (growth model) is a nice even rectangular shape. Then, I would tend to use a stop-loss level under the lowest low of the area.

The exception may be if the area was very deep - say 50% of the high price of the area or more AND the price was clearly trending before it broke out of the area. Then I might place my stop-loss under the last trough in that trend. This is tricky though. It is easy to get you time frame wrong and put it under a trough that is in a short term trend, so it requires judgement and experience. If in doubt, use the lowest low and go with a small position size until you see a trend develop above the area, when you can add to your position on rises from troughs or new highs.

When the accumulation or consolidation area is not nice and rectangular, you may have to have resort to the last trough. However, this again requires judgement and experience to get the time frame right as discussed above.


Keyword: