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Position Management (Archived)

Position Re-Entry at Support Levels

picture trailing stop

Dividend paying stocks are popular with investors seeking an income stream. These stocks can also provide solid capital gains while they continue 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 SNH chart from the June 2014 Dividend Stocks article was based purely on fundamental considerations with no regard to the position's entry or its subsequent management. The SNH position entry is shown below in Chart 1. without the earnings data.

Chart 1. Position Entry and Initial Stop

Chart 1 SNH

As shown in the weekly chart above, SNH had broken out of a multi-year resistance level prior to the hypothetical stock purchase. From a technical analysis point of view, the entry timing was late and probably should not be taken as SNH may have already reached its target move from the resistance breakout. This means that SNH may be ready for a pullback and this needs to be taken into account with placing the initial stop (The Initial stop is the first stop-loss price level placed).

Since the entry is so high up on a strong rally, about the only initial stop method worth using is a percentage stop. Any value can be used for the percentage but for this example a tighter stop of 5% below the highest close will be used as shown on Chart 1. above. The tighter stop is used since there is a high chance of a correction due to the strong rally.

Initial Stop Triggered

Sometimes a stock simply trades down from the entry price and goes straight through the initial stop.

Chart 2. Triggering the Initial Stop

Chart 2 SNH

The initial stop is placed at 5% below the highest close (Rally high shown on Chart 2. above). The closing price is the weekly close since the charts are weekly line charts. This means the closing price for the last trading day of the week (usually Friday).

Referring to Chart 2. above the WSM trades down from the entry price and closes below the trailing stop. The stock is sold on the next trading day.

Position Re-entry

Quite often it is worthwhile taking another position in the stock that the investor was just recently stopped out from. One of the quirks with position management is that the investor may be stopped out of investments that actually continued with its long-term uptrend.

Chart 3. Position Re-entry

Chart 3 SNH

After the position in SNH was stopped out, the stock continued to trade down to the Resistance level and bounced up from that level. In technical analysis, rebounds from Resistance levels provide a higher than usual probability that the stock will continue in the original trend direction. A hypothetical position can be taken. This time the initial stop can be conveniently placed below the low of the pullback which is also the Resistance level.

Trailing Stop Triggered

The same 5% trailing stop method will be used to manage the new position since it is expected to make a sharp and fast rally.

Chart 4. Trailing Stop Triggered

Chart 4 SNH

Referring to Chart 4. above, the trailing stop is activated once SNH closes more than 5% above the entry price. On the chart the trailing stop is placed at 5% below the new highest close (Rally high on the chart). SNH then pulls back and closes below the trailing stop which gives the signal to exit the position. The stock is sold on the next trading day at around the same price as the entry price.

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