Ask Colin

Why do you exit trades on daily charts rather than weekly closing prices?

I have answered quite a number of questions on my web site about this business of daily and weekly charts. Usually the problem is that people get hung up on the idea that the two charts are somehow different. In fact they are just two ways of presenting the same data. It is the same trend, just displayed differently. The same lows make the troughs on the daily and the weekly charts. However, your question is somewhat different and although I have addressed it before on the web site, it is worth doing it again.

I trade trends. Uptrends remain intact while each trough is higher than the one before. Those troughs can be seen on either weekly or daily charts and decisions taken from either chart. Once the price falls below the last trough in the trend, the trend is over (at least for the time being) and I get out. This will be the day after the day in which the low was below the previous trough in the trend. I can track this on either a daily or a weekly chart, since the trough will be violated on the same day on both charts.

The weekly chart may help see the right perspective on the trend so I do not act on a trough that is too short term for the trend I am trading. I am exploring this issue some more in my charting article in August 2003 Shares magazine, but you will appreciate that I cannot give you a copy of that article now. It will be on the subscription web site three months after publication.

The point you are raising is a different one, though. That is why I act on the daily or weekly low, rather than the weekly close. The answer goes back to the definition of trend. If the price violates the previous trough in the trend, then the trend is over. So I get out. Where the price closes is not important at all.

Now, this is not to say that someone can not have a plan that calls for action only on a weekly close below the last trough in the trend. This is equivalent to using a filter in a moving average method. The problem I see with it is this: Suppose your stop is $4.85, just below the last trough in the trend. Now suppose it is violated on Monday on a fall to $4.80. If the price falls to $4.70 on Tuesday, $4.60 on Wednesday, $4.50 in Thursday and closes at $4.40 on Friday, giving you your signal, I think that is far too late. You would need to have some other rule for a runaway move during the week.