Position Trading: Definition, How it Works, and Strategies (2024)

Positional trading is a type of trading that occurs when a trader buys & holds an investment with the expectation that its value will rise over the course of a longer period of time. Position trading is done by someone who is less disturbed by short-term price fluctuations and the day’s news. A position trader’s stance is unlikely to change unless they modify the trader’s long-term view on the significance of the position in the stock market.

Positional traders often seek to time their trades to benefit during the most lucrative trend phase when an asset is moving in a direction consistent with a longer-term trend. The vast majority of assets, including stocks, follow a pattern in which a significant change in the fundamentals that determine the asset’s value is followed by a movement in price. On the other hand, some assets stay dormant for a period of time before moving due to major alterations to either their own fundamentals or the industry’s fundamentals. Position traders don’t engage in business transactions.

Position trading works by giving an investor returns over a larger time frame. The position trader is calmly waiting for their longer-term price target to be attained or not, riding out the short-term ups and downs of the market price. The concept of market trending is fundamental to position trading, which is based on this principle. Position traders will enter a trade to capitalize on an upward or downward price trend over the long run.

Position trading strategies enable investors to keep hold of their position in the stock market for a longer period of time than the intraday timing allows for. This time frame can be as short as one day or as long as one month. Because of this, there is a greater possibility of making a profit but also a greater potential for loss.

What is Position Trading?

Position Trading is a type of trading done by the long-term investors in the hope that their investments would reach their potential value in the future. This term would last for many weeks, months or years at a time. Position traders make use of the fundamental analysis in the stock market to make trading and investment decisions.

Positional traders invest in the shares of a business based on extensive research, with the expectation that the firm’s stock price will rise in the near future due to favorable market circ*mstances or trends. Position trading is often referred to as trend following because the direction of the trend is so important. The investors wait for these equities to reach their highest levels before selling them to make a profit. Positional traders recognize these trends through analyzing candlestick charts, tables, and bar graphs, as well as the judgments that the government has made on its policies. This gives them an idea of any potential increase in stock values in the near future.

For instance, any declaration made in the Union Budget about concessions offered to the electric car industry may lead to a rise in the stock prices of such companies in the not-too-distant future. When this occurs, positional traders may decide to purchase shares of electric car businesses in anticipation that the values of those shares will rise over the course of the next weeks or months.

How does Position Trading work?

Position trading works by giving an investor returns over a larger time frame. It is necessary to have a predetermined entry and exit strategy, as well as a stop-loss goal when trading positions. After doing comprehensive fundamental research or being informed of a favourable policy shift, positional traders enter this type of trading.

They decided on an exit strategy, which stipulates that they would get out of the transaction and sell their asset when the asset price hits a certain level after careful deliberation. Position traders will carry out their stop-loss aim to get out of the transaction if the asset price does not increase and continues to decline.

Position traders are those who do position trading. They purchase a stock because they are confident in its future growth prospects and potential, and they maintain their long position even though the stock’s price may be volatile in the short term. For instance, if the market sentiment turns bearish and the price of the stock you hold falls, as a positional trader, you will not let this affect your decision because you will not let it affect your decision.

Let us take an example to understand position trading better. Imagine that two years back, you believed a company (XYZ) would profit from an increase in the amount of money spent on online shopping. If what you say is accurate, then the price of the company’s shares may go up over the course of the next several months.

So you decide to acquire some shares. You purchase ten shares at a price of Rs.100 per share. In addition, if you find that you are losing money on the stock, you should sell it as soon as possible. You decide to set a stop-loss order at Rs.200, which is below the bottom point of the most recent price swing. You are pleased with where you are, so you monitor the stock price every couple of days and observe as it makes its way up to around Rs.600 in a few months. You are pleased with this increase and decide to sell all of your XYZ shares, resulting in a profit. But position trading does not always work out thus cleanly, nor are you guaranteed to earn a profit in every instance. But taking a position in the market may be as easy as this.

What are the different trading strategies that can be used in Position Trading?

Strategies allow you to make use of position trading the best. These strategies will primarily help you figure out the right entry and exit point. Below are some of the position trading strategies.

1. Technical Analysis Strategy

Technical analysis is the tool that positional traders use to anticipate price rises. Technical analysis is a method traders use to analyze price charts to assess the performance of an investment and locate profitable trading opportunities. Technical analysts believe that the history of an asset’s trading volume and price fluctuations may provide useful clues about the price the security will reach in the future.

People may choose to make financial investments to profit from the change when the tide turns. After settling on position trading as your strategy, choose a market to participate in. To do this, you need to know how each asset performs under certain circ*mstances and whether or not those variables are now affecting those markets. This can be done through technical analysis.

Position traders using technical analysis have a firmer command of the markets and a deeper understanding of fundamentals and technicals.

An example of technical analysis in position trading is using support and resistance lines. Support and resistance lines help determine if an asset’s price is more likely to continue falling into a negative trend or growing into an upward trend. For instance, if you are invested in a company and it crosses the support line, there is a chance for it to go down further. The moving average can be used to act as the support level in the uptrend and resistance level in the downtrend.

2. Fundamental Analysis Strategy

Fundamental analysis is often used as a primary tool for position trading. Position trading tactics, when combined with fundamental analysis, give a solid basis for reliable decision-making. The value of a stock or investment may be calculated using a technique called fundamental analysis. It entails looking at the company’s leadership, business strategy, financial ratios, and financial statements. The term “fundamentals” may also be used to refer to industry trends, macroeconomic statistics, and general economic circ*mstances.

Because position trading strategies are focused on longer time frames, the significance of short-term price movement is diminished. Because of this, fundamental analysis and position trading are quite useful when used in conjunction with one another. A trader should disregard short-term market volatility since the fundamental goal of trading is to capitalize on longer-term market trends.

An example of fundamental analysis would be investing in a company XYZ after doing research based on numbers and other statistics and finding that the company XYZ is joining hands with another top company. This would show a potential for growth and boost the investor’s sentiments.

3. Support and Resistance Trading

The support and resistance are used to identify trading opportunities in position trading. Certain price areas on a chart are known to attract the most amount of buying or selling. These price points are referred to as support and resistance. A price is considered supportive when there are more buyers than sellers at that price. In the same vein, the resistance price is a price at which there is likely to be a greater number of sellers than buyers.

It is quite likely that the price will first increase to the level of resistance, then level off, use all of the available supply, and then begin a downward trend. When there is an upward trend in the market, one of the most important parts of the technical analysis that market players look at is resistance. The resistance often serves as a catalyst for selling.

One of the most important ideas to remember is that if a level of support or resistance is breached, its function will switch places. If the price goes below a level previously acting as support, that level will turn into resistance. When the price breaks through a level of resistance, that level often transforms into a level of support. It is believed that a change in supply and demand occurs when the price goes beyond a level of support or resistance, leading the breached level to reverse its position as support or resistance.

For example, let us consider you are holding stock and the price breached support or resistance level. It is a signal to either sell or buy the stock according to line. The below picture is an example for this.

4. Breakout Trading Strategy

Shares are considered to have had a breakout when they rise over either their support or resistance level. Breakouts, an important concept in technical analysis, may serve as an early warning sign that a stock is getting ready to make a significant move.

Therefore, it will often continue to do a prolonged upward climb if a stock price is able to go over its resistance level. it might go on a downward trend If it breaks through the level that it has been supporting.

It is common practice to regard support and resistance levels as stronger if security strikes them more than once. Therefore, shares of stock that break through these supposedly stronger levels often exhibit considerable price movement.

A breakout trader is one who enters a long position after the price of a stock breaks above its resistance level or enters a short position after the stock price breaks below its support level. As soon as the stock trades over the price barrier, volatility is likely to grow, and prices will typically trend in the same direction as the breakout.

Not only can stock prices sometimes breach support and resistance levels, but other assets also do so. Breakouts from essential support and resistance levels are possible for all types of financial assets, including commodities, foreign exchange, and cryptocurrencies.

In the above picture, you could enter a long position when the price goes above the resistance level.

50-Day Moving Average Trading

Investors searching for growth stocks and breakouts turn to the 50-day moving average as one of the most reliable and well-respected technical indicators available. Investors can quickly determine if a company is exhibiting strength or weakness by analyzing the position of its current price in relation to the line. This line provides this information based on the stock’s historical performance.

Unlike exponential moving averages, which emphasize more recent price activity, the 50-day moving average is based only on the most recent price data.

To generate the line, we simply average the stock’s closing price over the previous 50 trading days and plot that average against time. investors may use this as a reference point If the stock’s price is currently above or below this line.

The 50-day line should be one of the first things you look at When examining a stock chart. For investors, stocks trading above this level instantly signal strength. A stock’s weakness is usually indicated when it trades below this level.

It’s preferable for a stock’s base to develop at least in part, if not totally, above the 50-day line. Investors will thus not be concerned if the stock makes a breakout attempt but is rejected at the 50-day line.

Pullback Trading Strategy

Pullback trading is when the price of a stock or commodity in the stock market stops or moves in the opposite direction of the dominant trend. It is only a transient fall in the price of an asset that is normally heading higher. Pullbacks only last for a limited period of time, in contrast to “reversals,” which include price decreases that are more likely to be long-lasting.

Pullback traders look to purchase equities or commodities whenever there is a temporary decline in price within the context of a larger rising trend. In order to trade successfully, the market has to be moving in either the upwards or downward direction. It is hard to make a profit from a retreat if there is no underlying trend within which to trade.

There are a variety of criteria that may be used to determine when to enter pullback trades; however, there are just two that I consider being of the utmost significance. The first consideration is whether or not there is support or resistance available. You are able to give yourself a position in which the market is demonstrating demand (resistance) and supply (support) when you have support or resistance accessible (resistance).

It is desirable if the market is moving higher and is in an uptrend, for the retracement to test the support level first before continuing higher. Resistance becomes the level at which you want to see a pullback in price before the trend resumes its descent when prices move downward.

It is optimal to have support and resistance converging in the same place. The discovery of the most powerful kinds of support and resistance relies heavily on confluence. These may be intersections of other kinds of levels, such as horizontal levels, trend lines, slopes, Fibonacci, or moving averages, to name a few of the possible varieties.

The price movement is the subject of the second component of the entry equation. After either support or resistance has been attained, it is desirable to see a powerful response. That is, verifying price activity that suggests market players are in demand for prices to go higher or in supply that will assist push prices down. This will help determine whether prices will move higher or lower. Candlesticks are excellent for demonstrating the demand and supply dynamic in action.

7. Retracement Trading Strategy

Traders often turn to the Fibonacci numbers when doing technical analysis. Historically, the Fibonacci retracements have served as levels of support and resistance for stock prices, but there does not seem to be any evidence that may explain why this is the case.

For analysts to manually draw up a Fibonacci retracement, they must first determine the overarching trend that applies to the time period. The Fibonacci retracement tool is then dragged from a low point to a high point in an uptrend or from a high point to a low point in a downtrend, depending on the direction of the trend. After that, the retracement levels will be shown automatically based on the points of the lowest and highest price. The below is a representation of the same.

What are the examples of Position Trading?

Examples of position trading can be found in investing habits of the everyday investor. A position trader is someone who purchases an investment with the intention of holding onto it for an extended period of time in the hope that its value will rise. This kind of trader is less bothered with short-term price changes and the news of the day, provided that neither significantly shifts the trader’s perspective on the position over the long run.

For example, Eicher Motors Ltd. is a share that has grown substantially in the last decade. Position trading is when you spot this opportunity and invest in them for the longer term.

What is the advantage of Position Trading in the stock market?

The main advantage of position trading is the lesser risk associated with it. Market volatility and the inherent risk of day trading and scalping make profiting for these traders hard. Money invested in the market is also vulnerable to loss. Traders who take positions avoid this anxiety.

Below are three more advantages of position trading in the stock market.

• Keeping an asset for a significant amount opens the door for you to receive dividend payments whenever the company makes them available. You are eligible to get dividends only If you are a position trader.
• Trading positions may provide you with some much-needed breathing room so that you can better deal with challenging circ*mstances. Compared to Day Trading or Scalping, Position Trading gives you a greater cushion of time in the event that you need to install a stop-loss order on an asset you are trading.
• In a bear market, position traders often hold onto their bets. Compared to the other trading techniques, position trading does not allow for an early exit. There are several situations in which traders, especially day traders, are forced to cut their losses and get out of the market early. With position trading, you won’t have to worry about it.

What are the disadvantages of Position Trading in the stock market?

One major drawback of position trading is that it prevents investors from capitalizing on the frequent short-term price fluctuations that provide day and swing traders with enough possibilities to increase their earnings.

Below are three main disadvantages.

• No trader, no matter how seasoned they are, can help but worry about the value of their personal holdings if the market begins a downward trend. You’re concerned about the hefty cost of repeating the high leap and whether or not it will achieve the intended result. So, even if this is just a temporary disadvantage, it is still a downside of positional trading.
• Position trades need a massive financial commitment when compared to other trading strategies. As there are few opportunities for providing trades, the objective is to maximize the reward in a single transaction.
• Trading positions demand an understanding of how to examine data and fundamentals of assets. Position trading firms may be a good resource for novice traders looking for guidance.

Is Position Trading a good trading strategy?

Yes, position trading is considered a good strategy generally. Trading positions in the market is an excellent alternative to day trading since it does not need as much time in front of a computer screen as day trading does.

Comments