How To Trade Using Positional Trading Strategies
One of the long-term trading styles is position trading. Position traders sit midway between day traders and long-term investors. They stay invested in the market for an extended period, sometimes for weeks and months, before squaring-off their position to secure a larger profit. 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 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 position. 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.
Positional traders extensively use fundamental and technical analysis to recognise market movement. These strategies aren’t easy to follow, especially for new investors, but if you are beginning to explore positional trading, these strategies will help you grow confident with your choices.