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Position Management (Archived)

Breakouts to New Highs

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

Chart 1. Position Entry and Initial Stop

Chart 1 FINL

As shown in the weekly chart above, FINL has been bouncing along the multi-year support stuck in a trading channel. Technical analysis suggests that it would be better to wait for the stock to break out of the trading channel before taking an entry - this is because stocks can spend a considerable amount of time stuck in congestion. But since the hypothetical entry was dictated by fundamental analysis the position will be managed using technical strategies.

The first consideration here is where to place the Initial stop. The Initial stop is the first stop-loss price level placed. The initial stop should ideally be placed outside the trading range which means just below the lower support level. This gives FINL plenty of room to move about - if the stop is placed inside the trading range there is a high probability that the initial stop will be triggered while the stock is still stuck within the trading range.

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

Chart 2. Trades Higher within Trading Range

Chart 2 FINL

Referring to Chart 2. above, FINL starts to rally upwards after a pullback following the entry. The trailing stop could be placed under the pullback low but it is best if the initial stop remains until the stock breaks out to new highs.

Pullback Low Stop

Should the stock break out to new highs, then a trailing stop should be used. There are numerous trailing stop techniques that can be used but not all are suited to investing. A good trailing stop method for trending stocks is the pullback low method. With this stop method, the stop is placed under the low of the pullback once the stock trades above the rally high. Thus the stock must pullback and then rally up to new highs before the stop can be placed under the pullback's low.

Chart 3. Pullback Low Stop

Chart 3 FINL

Referring to Chart 3. above, FINL closes at a new 5-year high having broken out of its trading range. The closing prices are weekly closes since the charts are weekly line charts. This means the closing price is for the last trading day of the week (usually Friday).

FINL did pullback slightly at the 5-year high and this pullback low could be used to place the stop. Basically it is expected that the FINL would rally upwards from here on - if it does trade back down then it will likely continue trading within the trading range and therefore it might be best to exit the position and move on to better rallying candidates.

Chart 4. Raise the Pullback Low Stop

Chart 4 FINL

Referring to Chart 4. above, the pullback low stop can be raised as FINL rallies to new highs after a small pullback.

Chart 5. Raise the Pullback Low Stop

Chart 5 FINL

Referring to Chart 5. above, FINL continues to rally higher with another pullback from which the stop can be placed under that pullback's low.

Stop Triggered

An exit signal is given when the stock closes below the trailing stop.

Chart 6. Stop Triggered

Chart 6 FINL

Referring to Chart 6. above, FINL trades down to close 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 25% over a 15-month period.

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