Position Trading Definition Examples Top 3 Strategies

Position Trading Definition

Position trading is a strategy wherein a trading position is held for a long period (generally weeks or months) to achieve profit. A trader normally has long-term thinking in position trading and holds the position for a prolonged period irrespective of the short-term gyrations. For example, the positions could belong (buying the asset first) and short (selling the asset first). This form of trading can also be termed trend following, and traders generally use long-term charts (weekly, monthly) to initiate trading positions.

How Does Position Trading Work?

Positional traders generally try to capture the juicy part of an asset’s move when it moves in a long-term trend. Most assets, including stocks, follow a pattern wherein they see a movement in price led by a significant change in underlying fundamentals. However, some assets stay dormant for a long period before moving, led by huge changes in their own or industry fundamentals. If these changes affect the industry’s long-term future, the asset price will see an accelerated move for weeks and months before it stops.

Example

A real-world example from recent history could be the steel industry. After China fell heavily on its polluting steel plants, the steel prices shot up significantly, closing many. This closure impacted the global steel supply as China was the steel supplier to the world. Led by this development, steel prices shot up, and so did the price of steel manufacturers outside China.

A positional trader would have taken a position in steel stocks outside China to profit from this change. As the story played out for over a year, this positional trade would have earned handsome profits in the long run.

Position Trading Strategies and Techniques

While there are no standard strategies that traders follow in positional trading, a trader can choose his trades based on his skill set. Generally, traders have a knack for technical analysis. However, some traders put in the extra effort to learn fundamental analysisFundamental AnalysisFundamental Analysis (FA) refers to the process of studying any security’s intrinsic value with the object of making profits while trading in it. The primary purpose of fundamental analysis is to determine whether the security or stock is undervalued or overvalued and thereby make an informed decision to buy, hold, or sell it in order to maximize the potential for gains.read more and use both – technical and fundamental analysis – to make money in trading.

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The following are the strategies that one can use in position trading: –

#1 – Technical Strategy:

A technical strategy uses only charts to determine the long-term trend of the asset price. It generally analyses the asset’s price, volume, and relative strength, and trades initiate when the asset price displays a long-term trend behavior. This trading is purely price-led and does not consider any fundamental factors.

#2 – Fundamental Strategy:

A fundamental strategy lays more emphasis on the basic factors that are driving the price of an asset. The plan only considers qualitative aspects and looks for a structural change in underlying business conditions. One important advantage of the fundamental strategy is that the trader can act much more confidently than trading solely based on technicalities.

#3 – Techno-Fundamental Strategy:

A fundamental techno strategy uses technical and fundamental analysis to make trading decisions. It uses charts to study price behavior and verify fundamentals to check long-term qualitative change. If the price is in sync with the change in fundamentals, the trade executes.

These strategies generally use technical and fundamental screeners, which help screen the prospective trading bets. Traders can devise entry and exit rules and stop-loss rules while formulating strategies. Traders also need to consider their capital base and market experience while beginning to trade.

As a risk management strategy, positional traders also use stop losses and capital allocation rules not to get wiped out during adverse market conditions. Stop losses in other strategies are generally narrow, while position traders have the liberty to keep wide stop losses to accommodate short-term swings in the markets and asset prices.

Risks Involved in Position Trading

Position trading can deliver huge losses if the trader cannot gauge a sudden change in trend.Leveraged trades can wipe out the entire capital of the trader in times of sudden declines in asset prices.Some traders do not consider asset allocation Asset AllocationAsset Allocation is the process of investing your money in various asset classes such as debt, equity, mutual funds, and real estate, depending on your return expectations and risk tolerance. This makes it easier to achieve your long-term financial goals.read more rules, which can cost them dearly if they put all their eggs in one basket.Many traders get carried away in prolonged market runs and do not cut their position despite witnessing many warning signals. It exposes their capital to more risk.

Advantages

Positional trading is less risky than swing trading, and day tradingDay TradingDay Trading refers to buying & selling securities/financial instruments within the same trading day to earn profit through margin loans. Day traders are also called speculators as they do a lot of guesswork in terms of securities. read more because a long-term element is involved.Positional trading uses fundamental and technical analysis Technical AnalysisTechnical analysis is the process of predicting the price movement of tradable instruments using historical trading charts and market data.read more, making the strategy more foolproof.Most big assets happen overnight, and one can capture these moves using positional trading.Positional trading requires less continuous involvement of the trader than swing or day trading.Availability of leverage is a positive in leverage trading as the asset is available as collateral.

Disadvantage

Position trading requires long-term capital, which is not the case with other trading strategies.Position trading requires skills in analyzing the fundamentals of the assets, which many technical analysts do not possess.The cost of mistakes is higher in position trading as stop losses are wider than in other trading forms.

Limitations

Position trading works best in trending (up and down) markets. One cannot make profits undertaking positional trades in a sideways market.It locks up the capital and exposes the trader to liquidity risksLiquidity RisksLiquidity risk refers to ‘Cash Crunch’ for a temporary or short-term period and such situations are generally detrimental to any business or profit-making organization. Consequently, the business house ends up with negative working capital in most of the cases.read more.

Conclusion

Trading is a high-risk activity, and traders must train and test themselves before achieving significant market success. Position trading is also the same. One must spend considerable time observing, understanding, and comprehending market movements to learn position trading. The best way to learn position trading is to analyze past data and derive patterns. Once a trader understands the market patterns, it becomes relatively easy to identify and execute trading strategies while following sound risk management principles.