What Is Position Trading?
There is a group of traders who live on the other side of the spectrum of day trading. They generally try to look at the bigger picture of the market and don’t get affected by short-term fluctuations and keep faith that the market will correct itself eventually. They put more emphasis on the long-term performance of an asset. They wait for a trend to emerge, rather than rushing to make quick profits from price fluctuations. In nature, position traders are closer to investors than other trader types.
Position traders hold onto their position for an extended period, expecting that the asset value will appreciate with time. The usual time-frame of position trading ranges from several weeks to several months. Only buy-and-hold investors or passive investors hold onto their positions longer than position traders.
Understanding Position Trading
Position traders base their decisions on the principle that if a trend has emerged, it will also continue. They follow the trend and utilise both fundamental and technical analyses in trading to capture a bigger share of market profit.
In style, position trading is the polar opposite of day trading, but it is also quite dissimilar to swing trading. Position traders stay invested even longer than swing traders. Here is how they do that.
Advantages of Positional Trading
- Reduce short-term risks: Position trading is less risky than swing and day trading because of the long-term elements involved. A trader may hold the trading position for a few weeks to a few months with the aim of capitalise on substantial asset price movement in the long run.
- Lower transaction costs: Because fewer trades are involved, the cost of position trading is lower than swing or day trading, meaning a higher profit after paying commissions and fees.
- Capitalising on a long-term trend: Asset prices move significantly in the long run, and position traders aim to capitalise on asset price movement due to the company’s fundamentals or macroeconomic trends.
- Less affected by market noise: Market noise and short-lived price movements can influence short-term trading strategies. Unlike those, position trading relies more on a broader perspective, allowing the trader to overcome the market noise and focus on the fundamentals of the underlying assets.
- Availability of leverage: The availability of leverage is a positive for position trading as the asset is available as collateral.
- Less involvement: Position trading requires less involvement than day trading, meaning traders can still manage their day jobs or other activities.
Disadvantages of Positional Trading
- Exposure to long-term market risks: Position traders hold their positions for a long time, which exposes them to long-term market risks.
- Limited trading opportunities: Position traders are involved in less frequent trading approaches, which limits the opportunities for trading.
- High capital requirement: Position trading requires substantial capital to withstand market fluctuations and maintain a diversified portfolio.
- Requires analysing skills: The position trading strategy involves fundamental analysis of assets, which is not necessary for swing or day trading.
- Emotional challenges: Holding a position for a longer period of time can be emotionally demanding. It requires patience and discipline to resist impulsive decision-making.
- Opportunity cost: While position trading may focus on long-term trends, it may miss short-term profit opportunities. In a fast-pacing market, some asset prices experience significant market swings in the short term.
- Higher cost of mistake: In position trading, the stop loss is usually placed at a higher level than in other trades, which makes position trading significantly more risky.
Position Trading Limitations
Position trading has a few limitations, including the following:
- The position trading strategy works best when the market is trending, moving either upward or downward. It is not the best strategy when the market is moving sideways.
- It locks up the capital and exposes the trader to liquidity risks.
- Predicting the market is difficult, which increases the risk that traders will lose their investment capital.
How To Trade Using Positional Trading Strategies?
Position traders sit midway between day traders and long-term investors. So, if you think position trading is your style, then you would need to update yourself on position trading strategies that are commonly used by traders.
Why do you need a positional trading strategy? Position traders stay invested for a longer period, which results in larger profit but also it increases the intrinsic risk amount for the trader. If during the period the trend switches, it can land you on the opposite side of the market. A strategy in place will help you identify emerging trends and plan entry and exit with accuracy.
Position traders, although base their decisions on both fundamental analysis and technical trading techniques, it is the technical analysis that forms the major part of their strategies. While you are analysing a chart, you are studying the mass sentiment regarding an asset, providing you with critical insights to plan successful trades.
Position traders are passive traders. Unlike day traders they don’t stay glued to the computer all day, which makes it even more vital for them to understand market trends, analyse patterns, and learn indicators to identify any deflection in the current trend.
Common Positional Trading Strategies
Positional trading strategies help to eliminate short-term market noise and allow traders to focus on the bigger picture. Positional traders ignore small trend changes and therefore need strategies, that is based on a strong foundation of rationality and analysis.
Now, let’s consider the list below.
Support and Resistance
Support and resistance lines allow traders to visualise the range within which the asset price is moving. Support creates a lower limit of price, and resistance constitutes the upper level. Here is how to identify support and resistance levels for an asset price.
- Historical data is a reliable option to identify support and resistance levels for the asset. Traders take into account periods of significant gains and losses as indicators for future price movements
- Support and resistance change their roles when a breakout happens. Traders take into account previous support and resistance levels to understand how asset price has moved
- Fibonacci Retracement also offer a useful technical analysis in understanding dynamic support and resistance levels
Breakout Trading Strategy
In breakout trading strategy traders wait for the price line to cross the support or resistance level. When the overhead resistance is broken, the trader enters a long position. Conversely, he enters a short position when the price breaks out of the support line. If you are good at identifying periodical support and resistance levels, this trading strategy will pay off.
50-days and 200-days EMA Crossover
50-days and 200-days EMA’s are considered best suited moving averages for positional trading strategy. Traders look for trading opportunities when the moving average lines cross each other.
When the fast moving average crosses the slow MA line from below the point of intersection is called the golden cross. It indicates a bull market going forward.
Conversely, when the 50-days MA crosses the 200-days MA from above, it indicates a bear market. The point of intersection is called death cross.
However, MAs are lagging indicators, meaning by the time the crossover happens, the trend reversal has already taken place. To correct this issue, traders combine stochastic RSI with MA lines.
Stochastic RSI implies to calculating RSI using the stochastic formula. Traders combine the two, moving average lines and stochastic RSI, on their trading charts to correct crossover flaws. A stochastic RSI will give an early indication of the formation of a golden cross before the MA crossover happens.
It indicates a beginning of a bullish trend when the stochastic RSI crosses over the 20-level. However, the signal needs confirmation before reacting to it.
To confirm the trend, look for price to break and close above the 200-days EMA. The 200-days EMA is considered as one of the most potent MA in positional trading, price closing above it is regarded as a strong enough signal to react on. In a trade placed using this strategy, the stop-loss is placed just below the most recent swing down.
Pullback and Retracement Trading Strategy
Pullbacks are short moments of market reconciliation that happens when the market is rising upward. Traders look for pullbacks in their trading strategies to plan entry. The policy is to buy low and sell high. So, when the price dips during pullback, traders enter the market. Now, they need to eliminate chances of trend reversal when the pullback happens. For that, they use Fibonacci Retracement.
Fibonacci Retracement helps position traders to identify when to open or close positions. They would draw Fibonacci Retracement lines on the price chart at 61.8, 38.2 and 23.6 percent. Positional traders use these lines to identify support and resistance lines and apply for identifing trading opportunities.
Traders use a range trading strategy when the price moves within periodical highs and lows, without any apparent trend. Traders use price range techniques to identify oversold assets to buy and overbought assets to sell.
Risk-Reward In Positional Trading
Since position traders stay invested for longer, their deals eventually result in higher-risk or reward. Unlike day traders, they don’t need to monitor daily trends constantly to plan entry and exit, but there are small factors that can weigh heavily on the risk-reward situation of a position trader.
Trend reversal: Position traders tend to ignore small price changes, but sometimes those can lead to a complete trend reversal. Unexpected trend reversal can result in substantial loss.
Reduced liquidity: Position traders are infrequent traders, and hence, their capital remains invested for an extended period, yielding in less liquidity.
Is Position Trading Right for You?
A lot depends on your personality as a trader as well as your financial goals. You need to comprehend why you are investing. No matter what your investment style is, stock investment demands time and involvement. However, positional traders don’t need to invest all their time in following the trend but need to stay connected to spot any sudden change in the market.
Secondly, position trading is deemed suitable when the market is bullish, moving upward. It may yield a bigger profit if you stay invested for longer. On the other hand, position trading is not suitable when the market is bearish or just moving sideways. In the case of the latter, day trading would be a better choice.
What is position trading?
Position trading is a long-term strategy where the trader holds the position for an extended period, ranging from months to years, to capitalise on fundamental trends and market movements.
What are the primary benefits of position trading?
Positional trading meaning, holding the position for a long time to capitalise on the price change of the asset. The following are the primary benefits of position trading.
- You can apply it to a wide variety of assets: stocks, ETFs, bonds, commodities, and currencies
- It involves lower transaction costs
- Traders capitalise on long-term trends and avoid short-term market noise
- It doesn’t require constant monitoring of the market, like day trading
How long do traders hold their positions in position trading?
The duration of the trade depends on the strategy and style of the trader. It can last from a few months to a few years.
What are the risks involved in position trading?
The most significant risk associated with this type of trading is a sudden trend reversal. If the trader fails to correctly gauge a trend reversal, it can lead to significant financial loss. Additionally, position trading also involves liquidity risk.