What is Position Trading?

Position trading is an investment strategy that involves buying and holding stocks with a long-term approach. This strategy ignores the daily fluctuations in prices and focuses on long-term growth. The focus of the investor in this strategy is to look for a trend to emerge and stay invested for the long term to reap the best possible benefits. Every investor strives to time the market perfectly while investing. Ideally, the market cannot be timed perfectly, even with detailed research and the greatest of analytical skills.

Position trading means taking a position in the market and holding it for months or even years. A theme or a macroeconomic trend is used as a basis for this approach.

Position traders are like investors rather than any other traders in the market. Only passive investors hold and buy stocks for a time period more than position traders. The basis of their decision is if a certain trend may come into effect or if a theme is materialising in the market.

How is the trend identified?

Positional trading allows both fundamental and technical analysis to recognise a trend. A combination of both these techniques is used in position trading. Macroeconomic factors are also indicators of a trend for a stock. Other than the above-given indicators, there are trends that an investor can pin down by researching sector-specific stocks. Some trends can even be seasonal. An example of sector-specific trends is electric vehicles. Trends are derived using multiple factors as the basis and can be identified using numerous strategies.

Common strategies used in position trading are:

• Support and Resistance

  The asset price movement is seen from the support and resistance lines. Support is the lower limit of the stock price and resistance is the upper limit. Historical data is used as a benchmark to identify the support and resistance levels of stock. When a breakout happens in the market, the support line becomes the resistance and vice versa.

• Breakout strategy

  In this strategy, the investor delays entering the buy position for a stock till the resistance i.e; the upper limit of the stock price is broken. On the other hand, the investor will enter a sell position if the support i.e; the lower limit of the stock price is broken.

• Range Trading

  When there is no specific trend that can be identified, investors trade using a range trading strategy. It helps to identify the assets that are overbought and oversold. The investor sells and buys these assets respectively.

Passive Investors vs. Position Traders

While timing the market, the point where the investor exits is exceedingly crucial. Position traders keep an alert watch on the market and stay updated with every possible development on their existing position and on the probable opportunities. It helps them plan for a smooth entry and exit strategy. It differentiates them significantly from passive investors, that are largely concerned with making good returns over a period without paying attention to all market developments.

Position trades make money or even incur a loss depending on where the stock is trading in real time. A position trader follows market trends and keeps a keen interest especially when a trend reaches its peak. It shows the clear dissimilarity between a passive investor and a position trader in the market.

Advantages of Position Trading

• Since position trading considers a combination of both technical and fundamental analysis, it is a dependable investment strategy.
• Position trading does not involve continuous monitoring. Hence, the interval of attention increases which acts as a benefit for the investor as they stay aware of most of the trading opportunities.
• The risk associated with position trading is less compared to intraday trading . Investors can adjust their positions based on the market behaviour. The analysis aids in letting the investor know the initiation of a particular trend. It helps in gaining maximum profit.
• Positional trading meaning refers to long-term investment. Therefore, no hedging is required against short-term bets in the markets.

Limitations of Position Trading

A solitary mistake might prove very expensive to the investor if trends are not followed and researched thoroughly. A position trader may identify multiple trends at the same time. However, taking a position on multiple stocks will demand high capital to be invested. In case of any price swings in the market, there is a risk of suffering a loss as well.

The capital blocked for position trading is relatively high and considering the timeframe of these investments, it can be an opportunity cost for the trader or investor.

How to Trade Using Positional Trading Strategies

To trade using positional trading strategies, you will need to:

1. Identify the trend: The first step is to identify the trend of the market. This can be done by looking at historical price charts and identifying the overall direction of the market.
2. Choose the right security: Once you have identified the trend, you need to choose the right security to trade. This means choosing a security that is well-positioned to move in the direction of the trend.
3. Set your entry and exit points: Once you have chosen a security, you need to set your entry and exit points. Your entry point is the price at which you will buy the security, and your exit point is the price at which you will sell it.
4. Manage your risk: It is important to manage your risk when trading using positional trading strategies. This means using stop-losses to limit your losses and taking profits when the market reaches your target price.

Positional trading can be a profitable strategy for traders who are willing to take a long-term view of the market. However, it is important to remember that this strategy is not without risk. Traders should always do their research and understand the risks involved before trading.

Here are some additional tips for trading using positional trading strategies:

• Use technical analysis to identify trends and support and resistance levels.
• Use fundamental analysis to assess the financial health of the underlying company.
• Diversify your portfolio to reduce risk.
• Use stop-losses to limit your losses.
• Take profits when the market reaches your target price.

Positional trading is a complex strategy that requires patience and discipline. However, it can be a profitable way to trade for those who are willing to do the research and manage their risk.

Conclusion

Trading in the stock market involves risk, and position trading is no exception. A proper analysis aids in understanding more about what is a position in stock markets and can surely maximise profits for investors.