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Position Management (Archived)

Initial Stops with Symmetrical Triangles

picture trailing stop

Investing in Growth stocks is a popular strategy with investors. The strategy provides strong returns while the stock continues trending upwards, however these uptrends can reverse with little warning. The position management strategies used by stock traders with their short-term trades can be easily applied to the long-term trends found with investing.

Position management works best with trending stocks that are expected to continue with their long-term uptrend. The position management strategies generally give poor results with stocks that are not trending.

Using position management strategies changes investing from a passive process into an active process! This may not suit some investors especially those who do not have the time or inclination to actively manage their investments. There is no requirement for investors to use any of the position management strategies. Some investors may simply be interested in the process involved and may consider employing these strategies when market conditions become difficult.

The position management strategies are analyzed using stocks from the Fundamental Investing series of articles. These articles consist of a selection of stocks analyzed for their investment potential and a hypothetical position is taken.

Position Entry

The position entry shown on the PCLN chart from the June 2014 Growth Stocks article was based purely on fundamental considerations with no regard to the position's entry or its subsequent management. The PCLN position entry is shown below in Chart 1. without the earnings data.

Chart 1. Position Entry and Initial Stop

Chart 1 PCLN

As shown in the weekly chart above, PCLN had formed a Symmetrical Triangle pattern prior to the hypothetical stock purchase. From a technical analysis point of view, the entry timing was reasonable (ideally it was a little late) as PCLN broke out through the upper boundary of the symmetrical Triangle.

The first consideration here is where to place the Initial stop. The Initial stop is the first stop-loss price level placed. For the symmetrical triangle, a good place to put the initial stop is below the lower boundary. This gives PCLN plenty of room to move about - if the stop is too close then the stock will likely be stopped out before it has a chance to rally.

As a general rule, investors need wider stops than traders since investors are looking for the big moves.

Trailing Stops

Once PCLN starts to rally the stop should be raised (the stop is now referred to as a Trailing Stop). There are dozens of trailing stop techniques used by stock traders but not all are suitable for investing.

The simplest trailing stop for investors to use is the percentage method. With this trailing stop the investor raises the stop level whenever the stock closes higher than the previous highest close. The stop level is placed at a fixed percentage below the highest close.

Chart 2. Place the Trailing Stop

Chart 2 PCLN

A 10% trailing stop is used in Chart 2. above. Since the initial stop was placed at a distance greater than 10% form the entry price, the trailing is only activated once the stock closes above the entry price plus 10%.

Since PCLN closed at 10% above the entry price this means the stop is now at the same price as the entry price.

Chart 3. Raise 10% Trailing Stop

Chart 3 PCLN

As PCLN continues to trend higher, the trailing stop is correspondingly raised to 10% below the highest close as illustrated in Chart 3. above. The closing prices are weekly closes since the charts are weekly line charts. This means the closing price for the last trading day of the week (usually Friday).

Position exit

The position exit signal is given once PCLN closes below the trailing stop rather than merely trading below the trailing stop. This gives the stock more room to move - which is beneficial for investing.

Chart 4. Stop Triggered with 10% Trailing Stop

Chart 4 PCLN

Referring to Chart 4. above, the trailing stop continues to be raised. PCLN after making its last highest close then pulls back and closes below the trailing stop.

The close below the stop gives the signal to exit the position. The stock is sold on the next trading day. The investment netted a profit of around 50% over a 10-month period.

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