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Position Management (Archived)

Managing Trend Reversals

picture trend reversals

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

Chart 1. Position Entry and Initial Stop

Chart 1 TEVA

As shown in the weekly chart above, TEVA has been trading along a multi-year 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. If TEVA does trade below the support then it may well continue with its downtrend.

The position can be managed with a pullback low trailing stop. With this stop-loss technique the stop is placed under the lows of the pullbacks as the stock rallies higher. If the stock does not rally, then the stop remains at the initial stop position. The stop is only raised after the stock completes its pullback - which means the stock must rebound and trade above the rally high reached prior to the pullback. Also stops are only ever raised, not lowered. So if the next pullback low is lower than the current stop level then the current stop remains at its current level.

Chart 2. TEVA Rallies

Chart 2 TEVA

Referring to Chart 2. above, TEVA rallies higher and closes above the resistance level. While the stop could be raised to under the minor pullback low, it is probably best if the stop was not raised until the stock trades clear of the congestion.

Chart 3. Raise the Stop

Chart 3 TEVA

Referring to Chart 3. above, TEVA has rallied well past the congestion zone and pulled back and rebounded to close above its rally high. The stop can be raised and place below the low of the pullback.

Chart 4. Raise the Stop

Chart 4 TEVA

Referring to Chart 4. above, TEVA rallies to a new high (marked Rally high) and then pulls back and trades up to close above the Rally high. The stop is raised and placed just below the pullback low.

Chart 5. Raise the Stop

Chart 5 TEVA

Referring to Chart 5. above, TEVA continues to rally and now makes a new 5-year high. The stop can be placed below the pullback low.

The position in TEVA remains open and the unrealized capital gain is around 75% over a 24-month period.

Stock Analysis for Finance Students and Investors