Position Management with the SAR
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.
The position entry shown on the RGA chart from the September 2014 Value Stocks article was based purely on fundamental considerations with no regard to the position's entry or its subsequent management. The RGA position entry is shown below in Chart 1. without the earnings data.
Chart 1. Position Entry
As shown in the weekly chart above, RGA had formed a resistance level which it penetrated and rallied to new highs. RGA is currently pulling back and technical analysis suggests that an appropriate place for the initial stop would be below the resistance level which may now act as support. Using a fixed price as a stop is known as a hard stop.
While the investor could use the potential support as a stop level, another stop method is to use an indicator which tracks the trend and alerts the investor when the trend might be reversing. A trend following indicator that works well with trending stocks is the SAR indicator (which stands for Stop And Reverse).
The SAR indicator needs its parameters altered to make it suitable for the longer term trends. The standard parameter values are (0.02,0.2) which is designed for short-term trading with daily charts - these do not work with investing time frames. Suitable parameter values for investing with trending stocks are (0.05,0.05) which are applied to a weekly chart.
Chart 1. is shown again in Chart 2. below with the SAR indicator applied.
Chart 2. SAR Indicator
The SAR Indicator plots a dot below the stock price while the stock is trending upwards and plots a dot above the stock price while the stock is in a downtrend.
Chart 3. SAR Indicator
As RGA starts to trade higher after its pullback the SAR indicator plots the dots below the stock price - Dots below means an uptrend is indicated.
Trend Reversal Signaled
A trend reversal is signaled when the SAR indicator plots the dot above the stock price.
Chart 4. Trend Reversal Signaled
Referring to Chart 4. above, the SAR indicator has plotted a dot above the stock price. This signals that the trend maybe reversing and this can be used as a suggestion to exit the position. The stock is sold on the next trading day. The investment netted a profit of around 20% over a 14-month period.
Stock Analysis for Finance Students and Investors