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Position Management (Archived)

Position Tracking with Monthly Bars

picture trailing stop

Value investing is a popular strategy with investors. This bargain hunting strategy can provide good returns over the long-term. The returns can be enhanced with stocks that continue to trend 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 ARLP chart from the July 2014 Value Stocks article was based purely on fundamental considerations with no regard to the position's entry or its subsequent management. The ARLP position entry is shown below in Chart 1. without the earnings data.

Chart 1. Position Entry

Chart 1 ARLP

As shown in the weekly chart above, ARLP has traded up to a new high and then pulls back. This is where the hypothetical position was taken with the entry criteria being based solely on fundamental analysis. From a technical analysis point of view, it would be best to wait and see where ARLP bottoms and starts trading up again. The pullback low would make a good place for the initial stop. However the entry where it is requires another technique to manage this position. One such technique is to switch the weekly line chart to a monthly bar chart and use a trailing stop method known as the 2nd Low Trailing Stop.

Monthly Bar Chart with 2nd Low Stop

The 2nd Low Stop is a trailing stop method that is well suited to investing when using monthly bars. The technique is quite simple and requires the investor to locate the next two bars with lows that are lower than the bar with the highest low.

Chart 2. Monthly Bar Chart - 2nd Low Stop

Chart 2 ARLP

Referring to the monthly bar chart above, the last monthly bar with the position entry has not yet completed as the entry is on 20-Jun therefore this bar is ignored.

The initial stop is determined by:

  • Locating the bar before the entry bar with the highest low. This bar is marked with HL (Highest low).
  • Now locate the bar with the next low below the HL bar's low. This bar is marked with 1 (the 1st low below HL).
  • Now locate the bar with the next low below the 1 bar's low. This bar is marked with 2 (the 2nd low below HL).
  • The initial stop is placed just below the low of the bar marked 2.

Chart 3. Raise 2nd Low Trailing Stop

Chart 3 ARLP

The 2nd Low stop is checked for every month. If the new stop is higher than the current stop then the new stop level is used. If the new stop is lower than the current stop then the current stop continues to be used.

The closing prices used are monthly closes since the charts are monthly bar charts. This means the closing price for the last trading day of the month.

Chart 4. Stop Not Triggered

Chart 4 ARLP

Referring to Chart 4. above, while the stock did trade below the stop during the month it did not close the month below the stop. For an exit signal the stock must close the month below the stop and not merely trade below the stop.

Chart 5. Raise 2nd Low Trailing Stop

Chart 5 ARLP

Referring to Chart 5. above, the trailing stop is raised again. Note the position of the bar marked 1. The bars do not need to be one after the other - it's the next lower lows that's important.

Chart 6. Raise 2nd Low Trailing Stop

Chart 6 ARLP

Referring to Chart 6. above, ARLP closed the month 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 35% over a 15-month period.

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