Position Trading Definition
Position Trading is a strategy wherein a trading position is held for a long period ( generally weeks or months) to achieve the profit objective. In position trading, a trader would generally have long-term thinking, and the position will be held for a prolonged period of time irrespective of the short-term gyrations. The positions could belong (buying the asset first) and short (selling the asset first). This form of trading can also be termed as 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 of the assets, including stocks, follow a pattern, wherein they see a trend in price led by a significant change in underlying fundamentals. Some assets stay dormant for a long period before they start moving, led by huge changes in their own fundamentals or the industry fundamentals. If these changes affect the long-term future of the industry, the asset price sees an accelerated move for weeks and months before it stops.
A real-world example from recent history could be of the steel industry. The prices of steel shot up significantly after China came down heavily on its polluting steel plants, closing a lot of them. This closure impacted the global supply of steel as China was the supplier of steel 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 more than 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 of technical analysis. Some traders put in the extra effort to learn fundamental analysis and make use of both – technical and fundamental analysis – to make money in trading.
Following are the strategies that can be used 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 price, volume, and relative strength of the asset and trades are initiated when the asset price is displaying 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 fundamental factors that are driving the price of an asset. The strategy considers only the qualitative factors and looks for a structural change in underlying business conditions. One important plus with fundamental strategy is that the trader can act much more confidently as compared to when he is trading solely based on technicals.
#3 – Techno-Fundamental Strategy:
A techno fundamental strategy uses a mix of technical and fundamental analysis to make trading decisions. It uses charts to study price behavior and checks fundamentals to study the long term qualitative change. If the price is in sync with the change in fundamentals, the trade is executed.
All of these strategies generally make use of technical and fundamental screeners, which help screen the prospective trading bets. Traders can devise their own entry and exit rules and stop-loss rules while formulating their own strategies. Traders also need to consider their capital base and market experience while they are beginning to trade.
As a risk management strategy, positional traders also make use of stop losses and capital allocation rules to not 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 of the markets and asset prices.
Risks Involved in Position Trading
- Position trading can deliver huge losses if the trader is not able to 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 regard asset allocationAsset 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. 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.
- 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. because there is a long-term element involved
- Positional trading uses fundamental as well as technical analysis, making the strategy more foolproof
- Most of the big moves in assets happen overnight, and one can capture these moves using positional trading
- Positional trading requires less continuous involvement of the trader as compared to swing or day trading
- Availability of leverage is a positive in leverage trading as the asset is available as collateral
- Position trading requires long-term capital, which is not the case with other trading strategies
- Position trading requires some skills on analyzing 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 they are in other forms of trading
- Position trading works best in trending (up and down) markets. One can not make profits undertaking positional trades in a sideways market.
- It locks up the capital and exposes the trader to the liquidity risks.
Trading is a high-risk activity, and traders have to train and test themselves before they achieve significant success in the marketplace. Position trading is also the same. If one wants to learn position trading, they have to spend significant time to observe, understand, and comprehend the market movements. The best way to go about learning position trading is to analyze past data and deriving patterns out of it. Once a trader understands the market patterns, it becomes relatively easy to identify and execute trading strategies while also following sound risk management principles.
This article has been a guide to Position Trading and its definition. Here we discuss how the position trading works along with the strategies and risks involved in it. You can learn more about trading from the following articles –