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Position Management (Archived)

New Trends and Pullbacks

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 KEP 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 KEP position entry is shown below in Chart 1. without the earnings data.

Chart 1. Position Entry and Initial Stop

Chart 1 KEP

As shown in the weekly chart above, KEP has started a new uptrend as the 52 week moving average (52MA) has turned and is now sloping upwards. KEP is generally in an uptrend but it is not a strong trend as the stock price is below the 52MA.

KEP does swing around a fair bit and a suitable position management strategy for such a stock is the pullback low trailing stop method. 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.

Raising the Stop

The stop is raised when the stock rallies pulls back and trades up to close above the rally high.

Chart 2. Raising the Stop

Chart 2 KEP

As Chart 2. above shows, KEP has rallied then pulled back and traded back up to close above the Rally high. The stop can now be raised and placed underneath the low of the pullback.

Chart 3. Raising the Stop

Chart 3 KEP

Chart 3. above shows that KEP has rallied again then pulled back and traded back up to close above the Rally high. The stop can now be raised and placed underneath the low of the pullback.

Chart 4. Raising the Stop

Chart 4 KEP

Referring to Chart 4. above, KEP rallies again then pulls back and trades back up to close above the Rally high. The stop is raised and placed underneath the low of the pullback.

Chart 5. Raise the Stop

Chart 5 KEP

Referring to Chart 5. above, KEP continues its uptrend and rallies to new 5-year highs. The stock 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 KEP

Referring to Chart 6. above, KEP continues to rally to new 5-year highs then pulls back and rallies to close above the Rally high. The stop is place underneath the pullback low.

Exit Signal

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

Chart 7. Exit Signal

Chart 7 KEP

As Chart 6. above shows, KEP continues to pullback and closes below the stop thereby giving an exit signal. The stock is sold on the next trading day.

The position in KEP netted a profit of around 50% over an 14-month period.

Stock Analysis for Finance Students and Investors