Ask Colin

How do you determine what is a peak and a trough?

A lot of it comes down to practice and experience which leads to the development of judgement, just as in most skills in life. However there are some guidelines:

1. You must have your timeframe clearly in mind. Are you a trader trying to catch short upthrusts in price, or an investor trying to catch a big trend?

2. Look at the previous character of the chart when it was trending in the timeframe you want to trade or invest in. This may give important clues.

3. Study hundreds and hundreds of charts over about 10 years history if you can, paper trading the trends that you intend to trade. This is the only way to develop the feel, and judgement you need without risking (and probably losing) a lot of real money in the market. That is how all successful traders and investors honed their skills.

4. In doing this, you will find lots of "rubbish" trends and ones that fail quickly. That is the nature of the beast. The way to make money is to let the few good trends run and cut your losses or small profits quickly on the "ratty" ones or others that fail. One or two stocks that double or better in a year can give you a superb result if you never allow a big loss.

5. Look more for the pattern than the time elapsed - especially if the speed of the trend seems to be changing.

6. Look for consistency. In a nicely unfolding trend, there will be a lot of consistency. Each up move will tend to go a similar distance and each peak and trough will tend to be a similar time from the last one. However, this is only a very broad tendency - it is futile to try to push it to something exact like 34 days. The markets just are not like that - or at least not for long.

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