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Position Management (Archived)

Position Re-Entry with Weekly Bars

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

Chart 1. Position Entry on the Weekly Line Chart

Chart 1a CHD

The Weekly Bar Chart

The weekly chart above is displayed as a line chart which plots the closing price for the week, which is the closing price for the last trading day of the week (usually Friday). Some investors prefer the chart to show more detail such as the price swings during the week. A simple way to show this additional information is to switch the chart display to weekly bars.

Chart 2. Position Entry on the Weekly Bar Chart

Chart 1b CHD

Referring to Chart 2. above, CHD is in a strong uptrend having made a new high and has pulled back to previous 5-year high. CHD looks set to rally again and from a technical analysis point of view this is an ideal entry point. The initial stop (the first stop-loss price level) can be conveniently placed under the low of the pullback which is essentially at the same level as the previous 5-year high. This will give the stock some room to move.

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

Initial Stop Triggered

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

Chart 3. Triggering the Initial Stop

Chart 2 CHD

Referring to Chart 3. above, CHD started to rally but ran out of steam and sold down to close below the initial 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 4. Position Re-entry

Chart 3 CHD

After the position in CHD was stopped out, the stock 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

There are numerous trailing stop techniques that could be used to manage a strongly trending stock like CHD. A good practical trailing stop technique for investors looking to ride the uptrend for as long as it lasts is the pullback low method.

With this method the stop is placed underneath the lows of the subsequent pullbacks as the stock rides the uptrend. So each time the stock pulls back and rallies again the stop is placed under the low of that pullback.

Stops are only ever raised - never lowered. So if a subsequent pullback's low is lower than the current stop level, then the stop remains at the current stop level.

Chart 5. Pullback Low Trailing Stop

Chart 4 CHD

Referring to Chart 5. above, CHD pulls back from its rally high then bounces of the 52wk MA and rallies to a new high. The trailing stop can now be placed underneath the low of that pullback.

Chart 6. Raise the Trailing Stop

Chart 5 CHD

Referring to Chart 6. above, CHD pulls back from its rally high then bounces of the 52wk MA and rallies to a new high. Since this pullback low is higher than the current trailing stop (previous pullback low) then the trailing stop can be raised to underneath the low of this pullback.

The CHD re-entered position remains open as it has not triggered its trailing stop. The unrealized capital gain is around 25% over a 13-month period.

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