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Position Management (Archived)

Strong Trends and Pullbacks

picture trailing stop

Investing in Growth stocks is a popular strategy with investors. The strategy provides strong returns while the stock continues 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 GPX chart from the November 2014 Growth Stocks article was based purely on fundamental considerations with no regard to the position's entry or its subsequent management. The GPX position entry is shown below in Chart 1. without the earnings data.

Chart 1. Position Entry and Initial Stop

Chart 1 GPX

As shown in the weekly chart above, GPX is in a strong uptrend making new highs. The rallying and pulling back to rally again to higher highs is a characteristic of trending stocks. The lows of these pullbacks make a convenient place for the stops.

The position can be managed using the pullback lows as trailing stops. 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 previous 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. GPX Starts to Rally

Chart 2 GPX

As Chart 2. above shows, GPX has rebounded from a pullback but has not yet closed above the Rally high therefore the stop cannot be raised yet. GPX must close above the Rally high first and then the stop can be raised. This is because if the stock just trades down from here it will not have formed a rally pullback pattern - which is needed to place the stop.

Chart 3. GPX Continues to Pullback

Chart 3 GPX

Continuing on from Chart 2. is Chart 3. above which shows how GPX never traded above the rally high. GPX has traded all the way back down to the initial stop but has not closed below it.

Chart 4. GPX Starts to Rally

Chart 4 GPX

Referring to Chart 4. above, GPX has rebounded and starts to rally. The initial stop has held so far as GPX has not closed below it.

Chart 5. Raise the Stop

Chart 5 GPX

Referring to Chart 5. above, GPX continues to rally and now makes a new 5-year high. GPX then pulls back and rallies past the 5-year high. The stop can be placed below the pullback low.

Chart 6. Raise the Stop

Chart 6 GPX

Referring to Chart 6. above, GPX rallies to new 5-year highs and pulls back with a short rally that fails. The stop is triggered as GPX closes the month below the trailing stop. The stock may well have topped out and the position should be exited the next trading day.

The position gained only around 10% over an 21-month period.

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