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Position Management (Archived)

New Positions at Moving Averages

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 GMCR 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 GMCR position entry is shown below in Chart 1. without the earnings data.

Chart 1. Position Entry and Initial Stop

Chart 1 GMCR

As shown in the weekly chart above, GMCR has rallied up strongly over the last year prior to the hypothetical stock purchase.

The first consideration here is where to place the Initial stop. The Initial stop is the first stop-loss price level placed. Since GMCR has just pulled back, the low of this pullback provides a convenient level at which to place the initial stop. This gives GMCR some room to move about - if the stop is too close then the stock will likely be stopped out before it has a chance to resume its rally.

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

Initial Stop Triggered

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

Chart 2. Initial Stop Triggered

Chart 2 GMCR

The initial stop is placed below the pullback low. These prices are closing prices on a weekly chart line charts. This means the closing price is for the last trading day of the week (usually Friday).

GMCR pulled back from the entry price and closed 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 GMCR

After the position in GMCR was stopped out, the stock traded down and bounced up from the 52wk MA (moving average). In technical analysis, rebounds from dominate moving averages provide a higher than usual probability that the stock will continue in the original trend direction. A hypothetical position can be taken. The initial stop can be conveniently placed below the low of the pullback.

Pullback Low Trailing Stop

The same stop-loss techniques used for the initial stop can also be used as a trailing stop. Using the lows of the subsequent pullbacks makes a very good and versatile stop loss strategy that is well suited to trending stocks - this method generally gives the stock ample room to move while it is trending higher.

Chart 4. Pullback Low Trailing Stop

Chart 4 GMCR

Referring to Chart 4. above, the pullback low trailing stop can only be raised once the stock makes a rally high then pulls back and rallies back up above that rally high to make a new high. This forms the pullback and the stop can placed below the low of that pullback.

Chart 5. Pullback Low Trailing Stop

Chart 5 GMCR

Referring to Chart 5. above the trailing stop is only raised whenever the stock pulls back from a new rally high and then closes above that rally high. The trailing stop is only ever raised; it is never lowered (should the next pullback low be below the previous pullback low).

Raising the trailing stop to higher pullback lows continues until the stock is stopped out.

The re-entered position in GMCR is still open and currently has a unrealized capital gain of nearly 100%.

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