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 close to investors than other trader types. To understand how the position trading works, let’s take a closer look at position trading style.
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, which we have discussed earlier. Position traders stay invested even longer than swing traders. Here is how they do that.
They rely on fundamental analysis and technical analysis and sometimes on both to find assets that are worth their attention. Their investment reaction also takes into account the macroeconomic and historical performance of an asset to determine the general market trend.
How Does The Position Trading Happen?
Position traders plan entry and exit in the market with a stop-loss in place. It doesn’t require you to get involved in daily trading activities, and hence, position trading isn’t a full-time occupation.
So when we are at the topic of position trading, let’s also clarify a few concepts that closely associate with it.
Fundamental Analysis: Fundamental analysis in position trading is associated with stock-picking, which allows traders to choose the winning stocks that will yield a higher return.
Technical Analysis: Technical analysis involves comparing different trading charts using analytical tools to find a trend that is likely to sustain and give off potential signals of a trend reversal.
The foundation of position trading is based on finding trend indications. Traders can select assets with an established trend to trade or use technical analysis to find potential assets with possibilities to trend in the future.
Key highlights of potential trading
– Positional trading is the polar opposite of day trading
– Positional traders ignore small price changes that happen daily and fix their eyes on trend development
– They weight more on momentum style of trading and eliminate the importance of entry
– The primary concern for position traders, however, is to stay in the market when the price eventually moves
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 which 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 in 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.