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Position Management (Archived)

Multiple Position Re-Entries

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

Chart 1. Position Entry and Initial Stop

Chart 1 HLF

As shown in the weekly chart above, HLF has traded up to its former high and pulled back slightly. This is where the entry was taken. In technical analysis terms this chart is showing a potential double top which is a bearish chart pattern. There is a chance with this chart pattern that the stock will trend downwards.

Technical analysis suggest that the investor should wait and see if the stock will trade above the 5-year high. However the entry was based purely on fundamental analysis and therefore the position needs to be managed. A suitable place for the initial stop is underneath the low of the minor pullback.

Raise the Stop

The stop can be raised once HLF rallies and closes above its rally high.

Chart 2. Raise the Stop

Chart 2 HLF

HLF rallies and closes above the Rally High shown on Chart 2. above. The stop can be raised and placed underneath the low of the pullback.

Stop Triggered

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

Chart 3. Stop Triggered

Chart 3 HLF

As Chart 3. above shows, HLF trades down and closes below the 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 HLF 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 4. Position Re-entry

Chart 4 HLF

After the position in HLF was stopped out, the stock trades down to a support level and bounces up. A hypothetical position can be taken and a good technical place for the initial stop is just below the support.

Initial Stop Triggered

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

Chart 5. Initial Stop Triggered

Chart 5 HLF

Referring to Chart 5. above, HLF starts to rally but soon collapses and plunges down to close below the initial stop. Re-entering a position will work sometimes and at other times the investor will be stopped out a 2nd time. The general rule is that the re-entered position needs to stand on its on merits. This means that if the investor did not have the original position, would the 2nd entry be a good entry? There are no guarantees with investing, the trick to investing profitably is to pick stocks where there is more potential to make money than the money that is risked.

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