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Position Management (Archived)

Moving Average Crossovers

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

Chart 1. Position Entry and Initial Stop

Chart 1 HCSG

As shown in the weekly chart above, HCSG had formed a support level from which it has rallied to a new high and has started pulling back. From a technical analysis point of view, the entry timing was reasonable (ideally it was a little late) but the entry was based on fundamentals and not technicals.

HCSG is a strongly trending stock and the position management needs to be considered. The moving average crossover is a position management technique commonly used by technical traders who favor the use of chart indicators.

The moving average crossover consists of a longer average and a shorter average. There's a wide variety of values that can be used for the two moving averages. Also the moving averages can be simple or exponential.

Using an exponential moving average produces a faster acting trend following indicator. The values for the moving averages can be anything but a 30-week and a 10-week moving average allows the stock to follow the uptrend while giving a reasonably early indication that the trend may be ending.

The Moving Average Crossover Indicator

Chart 1. is shown again in Chart 2. below with the moving averages applied.

Chart 2. Moving Average Crossover Indicator

Chart 2 HCSG

Referring to Chart 2. above, the longer moving average is a 30-week exponential denoted as 30EMA and the shorter moving average is a 10-week exponential denoted as 10EMA.

Exit Signal

While the stock is trending upwards, the shorter 10EMA plots above the longer 30EMA. An exit signal is given when the shorter 10EMA crosses over and drops below the longer 30EMA.

Chart 3. Exit Signal

Chart 3 HCSG

Referring to Chart 3. above, an exit signal is given as the 10EMA has crossed over and is now below the 30EMA. The investor could act on this signal and sell their position the next day.

However, studying the chart reveals that HCSG has pulled back and traded down and bounced up from a potential support level. In technical analysis this would be a good buying opportunity. Thus there is a conflict between technical analysis of the chart and the exit signal given from the moving average crossover indicator.

Sometimes the investor needs to apply logic and override the exit signal. The position could remain open and a fixed stop placed just below the support which is also the pullback low. Should the stock trade down through the fixed stop the stock would then be sold. Thus the investor would risk losing a few more dollars for the potential reward of the stock rallying to new highs.

The Uptrend Resumes

The moving average indicator will signal a resumption of the uptrend when the 10EMA plots above the 30EMA .

Chart 4. Resuming the Uptrend

Chart 4 HCSG

Referring to Chart 4. above, the moving average crossover indicator has signaled a resumption of the uptrend as the 10EMA plots above the 30EMA. The position will be tracked for the next time the 10EMA drops below the 30EMA.

Chart 5. The Uptrend Continues

Chart 5 HCSG

Referring to Chart 5. above, the 10EMA continues to plot above the 30EMA signaling that the uptrend remains intact.

The position in HCSG remains open and the unrealized capital gain is around 30% over a 18-month period.

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