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Position Management (Archived)

The Monthly Bar Chart with Stops

picture trailing stop

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

Chart 1. Position Entry

Chart 1 BPL

As shown in the weekly chart above, BPL is a stock that has rallied strongly and pulled back. The stock has rallied slightly up from its pullback bottom.

Stocks that make large gains in a short amount of time are at risk of a trend reversal. A position in such a stock needs to be managed. An appropriate position management strategy is to switch the weekly line chart to a monthly bar chart and use the 2nd Low Trailing Stop technique.

Monthly Bar Chart with 2nd Low Stop

The 2nd Low Stop is a trailing stop method that is well suited to investing when using monthly bars. The technique is quite simple and requires the investor to locate the next two bars with lows that are lower than the bar with the highest low.

Chart 2. Monthly Bar Chart - 2nd Low Stop

Chart 2 BPL

Referring to the monthly bar chart above, the last monthly bar with the position entry has not yet completed as the entry is on 20-Nov therefore this bar is ignored.

The initial stop is determined by:

  • Locating the bar before the entry bar with the highest low. This bar is marked with HL (Highest low).
  • Now locate the bar with the next low below the HL bar's low. This bar is marked with 1 (the 1st low below HL).
  • Now locate the bar with the next low below the 1 bar's low. This bar is marked with 2 (the 2nd low below HL).
  • The initial stop is placed just below the low of the bar marked 2.

Multiple Bars with the Same Lows

Quite often the stock chart will display several bars which have similar lows.

Chart 3. Monthly Bar Chart - 2nd Low Stop

Chart 3 BPL

As Chart 2. above shows, there are two bars the have essentially the same lows for the Highest low HL and there are three bars for the 1st low below HL - which bars do the investor use?

Where there are multiple bars with similar lows then the best thing to do is to group all those bars together and mark them the same. In the above chart two bars are marked as HL are grouped together and treated the same. Also the three bars marked 1 are grouped together and treated the same.

The investor can now easily locate the 2nd low below HL and mark this bar as 2. The stop is place just below the low of bar 2.

Raising the Stop

The stop is raised when the 2nd low below HL gives a higher low.

Chart 4. Raising the Stop

Chart 4 BPL

Referring to Chart 4. above, BPL rallies to new highs and the stop is placed underneath the 2nd low below HL. Note that there are two bars with similar lows for the 1st low below HL.

Chart 5. Stop Not Triggered

Chart 5 BPL

Referring to Chart 5. above, BPL traded below the stop twice but closed both months above the stop. An exit signal is only given if the stock closes the month below the stop.

Chart 6. Raising the Stop

Chart 6 BPL

Referring to Chart 6. above, the investor could raise the stop to below the bar 2 as this is technically the next stop level. Also notice that there are two bars for bar 1 and bar 2.

BPL is stuck in congestion and there are valid reasons why an investor may not want to raise the stop - one of those reasons is when a stock is trading in congestion. The 2nd low stop method works best when the stock is trending, so investors could wait until BPL trades at new highs before raising the stop.

The decision as whether to raise the stop or not is an individual preference and investors will make their own decision.

Chart 7. Closed below the Stop

Chart 7 BPL

BPL closes the month below the trailing stop as shown above in Chart 6. The position is exited on the next trading day.

The capital gain is around 15% over a 21-month period.

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