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Are you interested in position trading and how it works? Maybe you’ve been newly introduced to this type of trading, and want to know if it doesn’t need a great deal of management, unlike other types of trading. If this is the case, then this guide is for you.
You may ask questions like, what is position trading? What are the advantages and disadvantages of position trading? What tools can you use to trade, and what are some helpful strategies to improve your trading?
This article is a complete guide on position trading, its pros and cons, and strategies you can incorporate to improve your trading skills.
This article also compares other types of trading, such as swing and day trading. It will also tackle potential risks involved in this kind of financial activity.
A Brief Explanation of Position Trading: What Is Position Trading?
Position trading is a long-term investment where you buy stocks from a company or industry and hold them for months or even years until it grows in value.
This type of trading differs from others as position trading doesn’t focus on the daily fluctuations or price movements in the market.
The main goal in position trading is to choose an industry or company that you think will grow soon in value. This trading type involves different techniques and strategies that will be tackled further down as you read this position trading guide.
What Is Taking a Position in Trading?
A position is the amount of a security, commodity, or property owned by a company. Taking a position means buying securities through a buy order in hopes that, in the long period, the company or industry will rise, and you can profit from your investment.
When you take a position, you’re not affected by the daily rise and fall of commodity prices as your investment is in longer terms, usually lasting for months or years.
How Does Position Trading Work?
Position trading looks at long-term positions with good trading opportunities.
Position traders don’t focus on day-to-day trading and short-term price fluctuations. Instead, these traders look for industries that have the potential to grow in the future and always target trends that have longer periods.
Position trading involves understanding the market, market trends, company performance, and having insight into people’s needs in the future.
The following sections explain how position trading works and other factors that help people break into this type of trading.
Types of Position Trading
Position trading involves fundamental analysis and technical analysis to determine whether a trend is suitable for a long-term investment.
Some of the main types of position trading done today are:
Trend Trading Using Moving Averages (MA)
Trading using moving averages or MA is a technical analysis technique to determine if a trend is a good choice for position trading. This trading technique constantly takes the price averages in a set timeframe.
MA is calculated using historical prices and averages them out to predict the trend that can happen in the future.
An example of trading using the MA system is observing the relationship between a 50-day MA and a 200-day MA.
- The golden cross: The 50-day MA will have more price fluctuations than the 200-day MA. If the 50-day MA is on an upward trend and crosses the 200-day average line in a chart, it’s called a golden cross. It usually suggests a good trend.
- The death cross: On the other hand, when the 50-day MA is in a downward trend and crosses the 200-day MA as it trends down in a chart, it’s referred to as a death cross. It also suggests that a trend isn’t going well now and in the near future.
Support and Resistance (S&R) Trading
In position trading, you’ll be studying financial markets to assess long-term trends.
Support and resistance trading is a technique of reading a chart that can signal what the price trend be in the future. When you trade using support and resistance, you need to understand these two terms:
- Support: In the trends chart, the support is the area or line where the prices don’t fall further. If you look at a chart, the prices appear to bounce from this line as it fluctuates during the trading period.
- Resistance: The resistance is the area or line where the prices don’t go up any further. It’s like a ceiling that prices can’t push through. Therefore, it’s called resistance.
Understanding the support and resistance of a trend allows traders to predict the possible performance of the position taken in the following months or years.
Breakout Trading
When the prices fall through the support line or come out of the resistance area, it’s called a breakout. If this happens in the trends chart, it can mean that the prices will trend toward where the breakout happens.
A breakout in the resistance area suggests that prices are going up. The same goes for a breakout in the support area, which can mean that prices will trend downward.
Pullback Trading
When you analyse historical data and prices in a price chart, you’ll notice that sometimes, before a rise in prices, there would be a few dips in the trend followed by a significant upward trend. The dip in the trend line is called a pullback.
For many traders, a pullback means that a buying opportunity is opening. However, some traders mistake reversals for pullbacks.
A reversal is when the downtrend is long-term and doesn’t go back right up.
These downtrends may be due to underlying factors that affect the business. You, as a trader, must monitor the company or business you’re planning on buying a position. You should ensure that the investment is sound.
Advantages and Disadvantages of Position Trading
Just like any other trading opportunity, there are advantages and disadvantages that every trader must know, learn and accept.
Here are the advantages:
- Positional trading has fewer risks than swing and day trading, because of its longer period of time.
- Position trading uses technical and fundamental analysis methods that help improve and enhance trading strategies.
- Position trading doesn’t need constant monitoring, unlike day and swing trading. However, it can help if you have a good analysis of the market before you can start your trading.
Some of the disadvantages are:
- Position trading is a long-term proposition. Therefore, you’ll need long-term capital to make it work. Unlike other trading strategies, you’ll not be returning your investment quickly.
- Position trading requires good analysis, a grasp of the fundamentals of assets, and the ability to do technical market analysis. These factors can have a steep learning curve.
- Mistakes are more expensive compared to other types of trading.
What Instruments Do Position Traders Typically Trade?
When you start position trading, you’ll need analysis methods and instruments used by position traders. There are different ways to trade in the market, but the following are those commonly used instruments for this type of trading.
Stocks
Stocks and shares are popular among position traders because they’re more stable than other markets such as crypto. You can also do better analysis on stocks and shares as their activity is closely tied to the company’s performance.
Forex
Although many position traders aren’t fond of currencies for position trading because of their volatility, some delve into forex trading.
There are unique situations in currencies where long-term trends may happen. An example is the UK-EU referendum, which caused a clear trend following that lasted for almost six months.
Commodity Futures
Commodities are similar to shares as they are more stable than currency. Commodities include oil, energy, metals, or anything traded in the markets that people or businesses consume.
Understanding the Position Trader
To become a position trader, you’ll need to know this type of trader’s characteristics. Here are some things you’ll need to know to become a capable position trader.
Features of a Position Trader: What Is a Position Trader?
A position trader is a person who follows trends. However, unlike other traders, they don’t follow short-term trends.
Position traders focus on long-term opportunities they can hold up until it peaks before trading them for a profit.
The following are characteristics of a position trader. Check the list to see if these features fit you.
You Might Be a Position Trader if:
You can benefit well as a position trader if you have these characteristics.
- You can think independently and aren’t easily swayed by fads and opinions, no matter how popular it is, if it goes against your take on the market.
- You completely understand the fundamentals of position trading and accept that trading sometimes involves high-risk decision-making.
- You understand the effects of currency pairs and have foresight into how they work in the long run.
- You’re patient and aren’t impulsive.
- You have enough capital to keep yourself in the trading business despite downtrends.
You May Not Be a Position Trader if:
The following are the signs that position trading may not be the career you want to take.
- You’re not patient.
- The opinions of others quickly sway you.
- You lack an understanding of position trading.
- You don’t have enough capital for trading.
- You’re easily affected when the market doesn’t go your way.
- You want instant results and don’t want to wait for months or years to make a profit is just too long for you to wait.
If you feel that you have these characteristics, then it’s advisable not to continue position trading. There are faster-trading markets you can get into, like day trading and swing trading.
Tactics for Position Traders
Position trading requires strategies to be successful. That’s why in this article, you’ll get information on techniques you can use when you do start a career as a position trader.
- Traders get the best result when they know how to determine whether the price is right for you to enter or exit.
- Traders should use the stop-loss level to exit at the right time without losing too much during a downtrend.
- Traders constantly use market trends and fundamentals, and technical analysis to get a better overview of their investment options.
Do Position Traders Make Money?
If you trade well and are successful in understanding the ebb and flow of trends in the stock market, and if you properly incorporate all types of analysis, you can make money in position trading. However, it’s not as instant as other means of earning money.
Position Trading Strategies: What Is a Good Strategy for Position Trading?
Now that we’ve understood the fundamentals of position trading and the characteristics of a position trader, we can move forward into the trading strategies. The following is a list of popular strategies used by positional traders that have successful results.
Positional Share Trading
Positional share trading focuses on business shares. Traders can monitor closely businesses by following market announcements, company decisions, and events that affect business transactions.
Position share trading is a good base for position traders to start trading.
Positional Commodity Trading
Commodity trading is similar to shares because of its stability. However, the market recently showed fluctuations in items like oil and energy.
Therefore, if your trading style pushes you to take on commodity trading, you can be successful in this area. You only need to constantly monitor the economy and other factors that can affect the commodities market.
Positional Index Trading
Index trading is another market that position traders can take advantage of. The index is a cluster of businesses typically bounded by geography.
These businesses are connected in one chain, which makes it relatively stable for long-position trading compared to other markets.
Position Trading in Forex
When trading in the forex market, you’re working in a volatile market compared to shares and indices. This market isn’t as popular with position traders but attracts short-term traders like swing and day traders.
Trading Breakouts
When a breakout happens, it often signifies a beginning of a trend.
If the breakout occurs at resistance levels, then prices are rising, and there may be a trend in the future. If it happened at the support level, it may indicate that the market is in a downturn.
Support and Resistance Trading Strategy
The support and resistance strategy is used to analyse the opening of new trends in the market from long-term historical ones. This strategy relies on three factors that traders must be aware of:
- Support and resistance levels are mainly based on historical prices.
- Support and resistance strategies can look into past breakouts to determine possible new trends in the future.
- There are cases where support and resistance levels are dynamic depending on the price of an asset.
Range Trading Strategy
Range trading strategy focuses on overbought and oversold assets. This strategy works well in volatile markets such as forex trading.
Pullback and Retracement Trading Strategy
The aim of this strategy is to buy low and sell high during pullback and retracement. These two chart movements often signify a change in trends that traders can capitalise on.
How Do Position Traders Use a Fibonacci Retracement?
The trader draws six lines on an asset price chart with percentages based on the golden ratio. It’s a pen-and-paper method of determining support and resistance levels, which can be done now through software.
Technical Strategy
When position trading, you can incorporate technical strategy, which is the analysis of trends through prices, relative strength, volume, and trading history in the long term.
Technical strategy is a price-led approach and is one element in creating a good position scheme.
Fundamental Strategy
A crucial element of position strategy is understanding the fundamental factors that affect assets and the market.
Position strategy dives deeper into understanding the cause of price movement. Moreover, this strategy includes investigating business conditions and events affecting the company and its performance.
Techno-Fundamental Strategy
The combination of the technical and fundamental strategies offers the best result in determining and predicting price movements fit for position traders.
It can help if you have an understanding of the technicals of trading alongside a dive into the fundamental reasons for the changes in asset prices and chart patterns.
Short-Term Position Trading
You can try short-position trading, but you won’t find a lot of action, especially when trading assets that are fit for long-term markets. If you want a daily trading environment, you can join swing and day traders.
Positional Trading Indicators
When you start your position trading, you’ll need to look for indicators that will help you determine your next move and whether the trend is in your favour.
Here are the indicators you should consider when you make decisions as a positional trader.
Simple Moving Averages: 50, 100, and 200-Day SMAs
Moving averages are indicators for long-term trend movements of a particular asset. You can calculate the simple moving averages (SMA) after 50, 100, and 200 days.
Support and Resistance
Determine the historical highs and lows of assets, their ceiling price, and the lowest trend they made.
You can use these factors to see if a breakout might happen that will open a new market for traders.
MACD
MACD is moving averages convergence divergence. It’s an indicator used to signal when to enter or exit a trade. It can keep your candlestick charts clean and easier for traders to manage.
How to Time Your Entries for Position Trading
A position trader needs to know the perfect timing to enter a trade. A trader who doesn’t know when to jump into the fray may come in early or late to make any profit.
Both actions can result in a loss of money to some extent. Here are ways to determine the perfect time to join a trade.
The False Break
Watch out for false breaks. It’s an event in the trend movement where prices either went high or low, triggering traders into action only to see a reversal happen.
An example is when a commodity asset seems to rise through the resistance levels. The upward trend lures traders into entering the market, only to be dismayed when the trend suddenly changes, and the asset prices go down.
Volatility Contraction
It’s best to enter trading when volatility is low. However, there are cases where volatility seems low because it’s contracted in smaller intervals. Small fluctuation contractions often signal a future breakout but not always.
Setting a Proper Stop Loss to Avoid Getting Stopped Out Prematurely
Don’t place tight stop loss because you may exit prematurely due to the activity of price fluctuations.
It can help if you placed your stop loss at an area where once reached results in the destruction of your long-term position. To be safe, you can place a buffer above the resistance line and below the support.
Setting a Trailing Stop Loss and Ride Big Trends
When you set a trailing stop loss, you’ll need to know what you’re doing before moving forward.
- It can help if you have no profit target.
- It can help if you are confident in your decisions.
- You must be consistent and unwavering even when it feels uncomfortable.
- You need to follow basic trading principles.
Once you’ve absorbed these characteristics, you can now have a better understanding of the trailing stop loss setup process.
Average True Range
The average true range, or ATR, is an indicator of volatility in the market. You can use ATR to determine when to enter a trade or where to place your stop loss. To calculate the ATR on a given trend, you can follow these instructions:
- Subtract the previous close from the current high
- Subtract the previous close from the current low
- Subtract the current low from the current high
After getting the figures, you average it out over 14, and you’ll get the ATR. Here’s a formula you can follow:
Current ATR = ((Prior ATR x 13) + Current TR) / 14
Moving Average
To use the moving average (MA) to set up a trailing stop loss, do the following:
- Place your stop loss below the moving average during market trends,
- Exit the market when the close occurs below the MA
- Use long-term moving averages to make long-term trailing stop losses
What Is an Example of Position in Trading?
An example of taking a position in trading is when you buy financial securities during a buy order.
There are two positions in trading: long position and short position. Examples of these are:
- Buying USD/CHF currency pair: This is an example of a long position trading.
- Selling Euro/USD forex pair: This is an example of short position trading
Risks Involved in Position Trading: Is Position Trading Risky?
Generally speaking, the shorter the terms are, the higher the risk. It’s because a lot can happen in a short period of trading. However, long-term trading risks are relatively lower as the changes are spread out.
Limitations
Position trading works best in less volatile markets, but it still has limitations.
- Position trading works best in trending markets and doesn’t work well in a sideways market or a market with no clear trends.
- When you purchase a position, your capital is locked until you exit. It makes traders vulnerable to liquidity risks.
Is Position Trading for You?
If you have the will, courage, and determination to enter a trading system that isn’t focused on instant wins and have the necessary capital to invest, then position trading is for you.
Position Trading vs Swing Trading
Swing trading is short-term trading focusing on price swings from stocks that occur in intervals of weeks to a few months. It’s different from position trading, where investments are made for the long haul.
These two different types of trading have their perks and disadvantages.
Position Trading Provides Larger Profits per Trade Than Swing Trading
Swing trading offers faster outcomes to trading ventures than position trading. However, positional trading offers larger profits in the long run.
Traders say that position trading is best if you want future security, like funds for your retirement. On the other hand, swing trading can be an option if you want income for your bills.
Position Trading Requires Less Time Than Swing Trading
When you do position trading, you don’t need to monitor the market too closely compared to swing trading and day trading.
You only need to do your analysis and know the industry or business you’re buying securities from, and occasionally monitor the price charts.
Swing Trading Provides Quicker Profits Than Position Trading
There are cases where swing traders quickly profit to pay their bills, so they shift their careers to trading full-time. If you’re looking for a quick return for your trading, swing trading is an option.
The Approach to Finding Opportunities Differs
A swing trader looks for short-term opportunities and short-term indicators that signal a trend change requiring quick decisions.
Meanwhile, in position trading, you look for stable opportunities and companies with consistent historical stability for long-term investment.
Position Trading vs Day Trading
Day trading focuses on completing a successful trade before the day closes. In comparison, position trading doesn’t focus on daily fluctuations but on averages over set periods. You don’t need to micromanage your trading if you’re a position trader.
Key Takeaways
- Position trading, like any other trader, follows trends.
- Position trading focuses on identifying trends and investments. They buy and hold on to these investments until it reaches their peak, even if it takes months or years.
- Position trading must apply a mix of technical and fundamental analysis to become successful in this type of trading.
FAQs
- Is position trading the same as a buy and hold strategy?
Position trading is the same as the buy-and-hold strategy. The only difference is that a position trader doesn’t actually own assets from the company.
- How do I find a stock for position trading?
There are many sites that can advise you on where to find stocks.
- Is position trading good for beginners?
Position trading is for long-term investments, which may not work well with beginners that look for instant wins.
References
- Support and Resistance Basics https://www.investopedia.com/trading/support-and-resistance-basics/
- Golden Cross vs. Death Cross: What’s the Difference? https://www.investopedia.com/ask/answers/121114/what-difference-between-golden-cross-and-death-cross-pattern.asp
- Support and Resistance Basics https://www.investopedia.com/trading/support-and-resistance-basics/
- Position https://www.investopedia.com/terms/p/position.asp
- Golden Cross vs. Death Cross: What’s the Difference? https://www.investopedia.com/ask/answers/121114/what-difference-between-golden-cross-and-death-cross-pattern.asp
- Support and Resistance Basics https://www.investopedia.com/trading/support-and-resistance-basics/
