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Position Management (Archived)

Support and Position Re-Entry

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

Chart 1. Position Entry and Initial Stop

Chart 1 UTHR

As shown in the weekly chart above, UTHR has traded up to its former high and pulled back slightly. UTHR might trade back down to the potential support level. Technical speaking, the support level provides a good place for the initial stop (which is the first stop that is placed). Ideally the initial stop is placed just below the support to provide some leeway for the stock. If the stop is too tight then the stock will likely be stopped out early - before it had a chance to rally.

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 2. Initial Stop Triggered

Chart 2 UTHR

UTHR never rallied and simply kept trading down to close below the initial stop.

The closing prices are weekly closes since the charts are weekly line charts. This means the closing price is for the last trading day of the week (usually Friday).

Since UTHR closed below the 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 UTHR

After the position in UTHR was stopped out, the stock immediately rebounded and traded to new highs before pulling back to the former highs which may have formed a support level. A hypothetical position can be taken and a good technical place for the initial stop is just below the support.

Pullback Low Trailing Stop

A good trailing stop method for trending stocks is the pullback low method. With this stop method, the stop is placed under the low of the pullback once the stock trades above the rally high. Thus the stock must pullback and then rally up to new highs before the stop can be placed under the pullback's low.

Chart 4. Pullback Low Trailing Stop

Chart 4 UTHR

Referring to Chart 4. above, UTHR rallies to a new high (marked Rally high No.1) and then pulls back and trades up to close above the Rally high. The trailing stop is placed just below the pullback low.

Chart 5. Trailing Stop Holds

Chart 5 UTHR

Referring to Chart 5. above, UTHR rallies to a new high (marked Rally high No.2) and then pulls back to the trailing stop and rebounds to trade up to close at a new high. Since the pullback low is at the same level the trailing stop remains in the same position.

Chart 6. Raising the Trailing Stop

Chart 6 UTHR

Referring to Chart 6. above, UTHR rallies up to a new high then pulls back and rallies back up to close above the rally high. Since the pullback low is higher than the current trailing stop, the trailing stop is raised to just below the low of the pullback.

The re-entered position in UTHR remains open and the unrealized capital gain is nearly 100% over a 16-month period.

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