If you want to trade in stocks but can't keep up with the daily fluctuations, and don't want to engage in long-term investments, then positional trading could be ideal for you. Let’s understand positional trading strategies and how they may benefit your financial goals.
- What is position trading?
Of all the types of trading, position trading is the one with the longest holding times. Consequently, the profit potential is greater, but so is the risk. History is full of famous examples of great traders who made their fortune by implementing position trading strategies.
For example, in one of his latest newsletters, Joe Ross spoke of what is surely the longest example of position trading on record, which lasted almost ten years (from 1991 to 2000). The investor in question opened a long-term position in the S&P 500, which he held for a long period of time, by setting a trailing stop​​ that was triggered only when he felt that a good profit had been made, thus finally closing the position with a profit of 16 million dollars.
Another famous position trader was Philip A. Fisher, who, in addition to being a great investor and being followed by a large crowd of admirers, including Warren Buffet, made excellent investments, focusing on good companies with very encouraging data. In 1955, Fisher made a long-term investment in Motorola shares and held that position until his death at the age of 96.
Table Of Content
- What is position trading?
- Positional trading strategies
- Features of a position trader
- Positional share trading
- Advantages of position trading
- Disadvantages of position trading
Positional trading strategies
While position trading may appear to be easy, it requires deep fundamental and technical research, as well as a solid grasp of the markets. Here are a few strategies to help you trade more effectively:
- 50-Day Moving Average Trading
The 50-Day Moving Average Indicator is among the most important indicators in positional trading. 50 is a factor to both 100 and 200, which are moving averages representing important long-term trends. Whenever the 50-Day Moving Average indication crosses with the 100 and 200-Day Moving Average indicators, it may signify the beginning of a new long-term trend, making it a useful indication for positional traders. The stop-loss in a trade executed using this approach is set immediately below the most recent swing down.
- Pullback and retracement trading strategy
A pullback is a small drop or retreat in an asset's current rising trend. Pullback trading allows traders to profit on declines or delays in the upward trajectory of an asset's price. The goal is to purchase undervalued stocks and sell them after the asset has recovered from the setback and resumes its upward trajectory.
Pullbacks are frequently alluded to as retracements, although they are not the same as reversals. A technical indicator called Fibonacci retracement can help you evaluate whether a market decline is a pullback or a reversal.
- Support and Resistance Trading
Support and resistance indicators can assist you in determining if the price of an asset is likely to fall into a downward trend, or grow into an upward trend. Depending on this evaluation, you may determine whether to start a long position and profit from weekly, monthly, or yearly rising prices or a short position and profit from price reductions that last for a long time.
- When trying to ascertain support and resistance levels, the following three major factors must be considered.
- The most dependable source of support and resistance levels is historical pricing.
- Previous levels of support and resistance serve as indicators of future trends.
- Technical indicators that might provide dynamic support and resistance levels that fluctuate in response to the price of a certain asset.
- Breakout Trading Strategy
Breakout trading entails attempting to open trade during the early phases of a trend. Typically, a breakout strategy serves as the foundation for trading large-scale market swings.
A breakout trader, like a support and resistance trader, will normally start a long position once the stock price breaks just above the resistance line, or a short position after the stock goes down below the support level. As a result, to be a great breakout trader, you must be familiar with spotting levels of support and resistance.
- Features of a position trader
The term position trader refers to a type of trader who holds investments for a long period of time. As already mentioned, positions can be held on average for months or even years. Position traders are less concerned with short-term fluctuations, unless they can impact the long-term outlook of their position, and are by definition trend followers. Usually, most position traders do not trade actively, and are surpassed by long term buy and hold investors in the length of the time they hold their positions.
Position traders usually use a combination of technical analysis​ and fundamental analysis when making decisions, but also take into considerations other factors such as market trends and historical patterns. Good position traders are those who can successfully identify the right entry and exit points and know when to place a stop-loss order​.
Positional share trading
Position traders often trade company shares​. As a general rule, asset classes such as stocks tend to follow more stable trends than volatile markets, such as cryptocurrencies and some forex markets. Despite the occurrence of certain events, such as market announcements or relevant news, fundamental analysis of an underlying company​ represents a solid base from where position traders can evaluate the true value of a company and consequently, select the best opportunities for them. They can negotiate based on where they think some companies, or even industrial sectors, will find themselves in a year from now.
- Trading breakouts
Trading breakouts in any financial market can be useful for position traders, because they can provide significant information about the beginning of the next significant movement on the market. Traders who adopt this technique are attempting to open a position at the beginning of a trend.
- Positional trading indicators
Position traders tend to use both technical and fundamental analysis to evaluate potential price trends on the market. Here are some examples of popular technical indicators​ that can be used for position trades on any of the financial markets mentioned above.
- Advantages of position trading
It is a long-term strategy that can lead to big gains.
There is less stress for the trader than certain short-term strategies because positions don’t need to be monitored on a daily basis.
There is more time to spend on other transactions or other professional activities, as position trading only takes time when analyzing the prospective stock.
- Disadvantages of position trading
A lot of capital is needed to keep positions opened for a long period of time, as trades can last for several months, meaning that the capital is locked.
Large deposits are needed as trading positions with minimal funds is unfeasible. Strong price fluctuations are therefore more likely to lead to a total loss of the invested capital.
If the position stays open for a long period, swap fees can accumulate to a huge amount.
The risk involved in position trading is much lower than that daily trading or swing trading, but if a mistake is made, it will likely be fatal. If a trader goes against the trend, they will lose not only his deposit, but also the time they invested. Read more about managing trading risks​​.