As a financial market investor, you have probably heard of various trading styles and tactics that help traders make money in the markets. One such tactic is positional trading.
Positional trading is a strategy for stock market enthusiasts who aren’t interested in long-term investing and can’t keep up with the daily volatility. The strategy’s primary objective is to maintain the position through medium- to long-term stock market price fluctuations.
That said, let’s explore the concept of position trading and discuss various position trading strategies.
What is an open position in trading?
Before jumping into positional trading and its various strategies, we must understand what open and closed positions are in trading.
In investing, a position is considered open if a trade has been placed or formed but the opposing transaction has not yet closed. It is possible to have an open position after buying, selling, going long, or going short. Either way, the position is open until someone makes a countertrade.
What is a close position in trading?
When a trader closes a position, the trade is no longer open. You need to trade against the direction you started to close a position.
If you decide to take a long position in a stock, for example, you will need to sell the same units of shares to cover your position. You cannot reopen a position after it has been closed. You will see an adjustment to your account balance reflecting the realisation of any profit or loss at the moment of closure.
What is positional trading?
People who engage in positional trading often keep their positions open for a long time, even years. Rather than concentrating on temporary swings, the approach aims to profit from long-term market patterns.
One of the most common examples of positional trading involves holding onto your stake and selling it when the value grows. Positional traders are traders who use position trading approaches.
With the help of position sizing in trading (a trader’s total units held in a certain investment), investors may evaluate the total number of share units that are safe to buy to mitigate risk and make significant profits.
They calculate their position size based on the various risks associated with it, like trade risk and stop-loss level. In addition to tracking the market’s overall movement, investors evaluate assets based on technical and fundamental analysis.
The idea behind position trading is to purchase and hold stocks based on a trend that has the potential to take off; once the trend reaches its peak and the industry is experiencing significant growth, the stocks are sold off to generate profits.
Top 3 position trading strategies
Positional trading may appear straightforward, but it involves a thorough grasp of the markets and extensive fundamental and technical analysis.
Three fundamental methods for positional trading are:
- Support and resistance trading
Traders can see the range within which the value of an asset fluctuates by using support and resistance lines. Support and resistance set a lower limit and an upper limit for price, respectively.
By following these steps, you can find out where an asset’s price might be at these levels.
- Looking at historical data is one dependable way to find an asset’s support and resistance levels. Traders use time frames when there are significant profits and losses as predictors of future market moves.
- A breakout results in a shift in the roles of resistance and support. Traders leverage the historical data regarding support and resistance levels to assess whether the value of an asset has changed.
- Additionally, Fibonacci Retracement provides a helpful tool for comprehending dynamic support and resistance phases.
- Breakout trading strategy
The goal of breakout trading is to try to open a position when a trend is emerging. Generally, trading large-scale market movements is built around a breakout approach.
Traders using the breakout trading method watch for the price line to cross the resistance or support level. Opening a long position might be a good idea when the above resistance is breached.
On the flip side, if the price crosses the support line, the trader goes into a short position. This trading approach will be lucrative if traders can identify periods of support and resistance.
- 50-day moving average trading
Among the most vital indicators in positional trading is the 50-day moving average indicator. The moving averages 100 and 200, which show significant long-term trends, both have a factor of 50.
The 50-day moving average indicator is a helpful tool for positional traders since it may signal the beginning of an emerging long-term trend if it coincides with the 100 and 200-day moving average indicators. When employing this position trading strategy, the stop-loss is usually placed right below the latest price drop.
What is the best time frame for positional trading?
Being a positional trader means using several time frames to profit from your trading. The most popular time frames for positional trading to enter a trade are 60-minute, daily, and weekly charts. Identifying the stock’s price trend on the weekly chart is essential.
The current trend in stocks is what you should use as a basis for your trading decisions. Use the daily chart to keep an eye out for solid levels of support and resistance. These levels may be changed on the 60-minute chart to mitigate trading risk.
What Is Position Trading?
Position trading is a trading strategy where investors hold stocks for a longer period, typically ranging from a few weeks to several months. Unlike intraday or short-term trading, position traders focus on capturing larger price movements over time rather than small daily fluctuations.
Position trading sits between short-term trading and long-term investing. Traders analyse broader market trends and hold their positions until the trend plays out.
For example, if a trader buys a stock at ₹800 expecting it to rise to ₹1,000 over the next few months, they may hold the position during short-term volatility as long as the long-term trend remains intact.
Position traders usually rely on a mix of technical analysis, market trends, and sometimes fundamental factors to make decisions.
How Is The Trend Identified?
Identifying the trend is a crucial step in position trading because traders aim to ride a trend for an extended period.
Some common ways to identify trends include:
Moving averages: Traders use indicators like the 50-day and 200-day moving averages to determine whether a stock is in an upward or downward trend.
Trendlines: Drawing trendlines helps identify higher highs and higher lows in an uptrend or lower highs and lower lows in a downtrend.
Market structure: An uptrend is typically identified when prices consistently make higher highs and higher lows.
Technical indicators: Indicators like MACD, RSI, and ADX can help confirm the strength of a trend.
By combining these methods, position traders can identify sustainable trends and potential entry points.
Positional Stock Trading Strategies
Position traders use several strategies to capture medium-term market movements.
Support And Resistance
Support and resistance levels represent key price zones where buying or selling pressure tends to increase.
Traders often buy near support levels and sell near resistance levels when trading within a trend.
These levels help traders identify entry points, exit points, and stop-loss levels.
Breakout Strategy
In a breakout strategy, traders enter a position when the price breaks above a strong resistance level or below a support level.
A breakout usually indicates that momentum is building in a particular direction, which may lead to a strong price movement.
Position traders often hold the stock for weeks or months after a breakout.
Range Trading
Range trading involves buying a stock near the lower boundary of a price range (support) and selling near the upper boundary (resistance).
This strategy works well when a stock moves sideways without forming a strong trend.
Traders take advantage of repeated price movements within the range.
Passive Investors Vs Position Traders
Although both hold stocks for longer periods, passive investors and position traders have different objectives.
| Factor | Passive Investors | Position Traders |
|---|---|---|
| Investment Horizon | Long-term (years) | Medium-term (weeks to months) |
| Strategy | Buy and hold | Trend-based trading |
| Analysis | Mostly fundamental analysis | Mostly technical analysis |
| Trading Frequency | Very low | Moderate |
| Goal | Wealth creation over time | Profit from price trends |
Passive investors focus on long-term value, while position traders aim to profit from medium-term market movements.
Advantages Of Position Trading
Position trading offers several benefits compared to short-term trading.
Less time intensive: Traders do not need to monitor the market constantly throughout the day.
Captures larger price movements: Position traders aim to profit from bigger trends rather than small fluctuations.
Lower transaction costs: Fewer trades mean reduced brokerage and trading costs.
Reduced emotional stress: Longer holding periods reduce the pressure of quick decision-making.
Limitations Of Position Trading
Despite its advantages, position trading also has certain limitations.
Exposure to market volatility: Prices can fluctuate significantly during the holding period.
Capital requirement: Holding positions for a longer time may require larger capital.
Dependence on trend accuracy: If the identified trend fails, traders may face losses.
Potential Downsides Of Positional Trading
Some risks associated with positional trading include:
Market reversals: Trends can reverse unexpectedly due to news events or economic changes.
Opportunity cost: Capital remains tied up in one position for an extended period.
Overnight and weekend risk: Prices may change significantly due to global news when markets are closed.
Emotional discipline: Holding positions through short-term volatility requires patience and discipline.
How To Trade Using Positional Trading Strategies
To trade using positional strategies, traders usually follow a structured process.
- Identify a strong trend using technical indicators.
- Select stocks with consistent momentum or strong fundamentals.
- Enter the trade near support levels or breakout points.
- Set a stop-loss to manage risk.
- Hold the position until the trend weakens or target price is reached.
Position traders often review weekly or daily charts instead of minute-by-minute movements.
Conclusion
Your trading method, risk tolerance, and financial objectives will all determine if positional trading is right for you. Investors seeking long-term gain and prepared to stick to holdings for an extensive period may find positional trading appealing.
This strategy might be less stressful than day trading and allow you to profit from significant market developments.
FAQ’s
Positional trading is a strategy where traders hold stocks for several weeks or months to benefit from a broader trend.
For example, if a trader buys a stock at ₹500 expecting it to rise to ₹650 over the next two months, they hold the position until the target price is reached.
The main benefits include capturing larger price trends, reduced trading frequency, lower transaction costs, and less need for constant monitoring compared to intraday trading.
Position traders typically hold their trades for a few weeks to several months, depending on the strength of the market trend.
Key risks include market reversals, overnight price changes, incorrect trend analysis, and capital being locked in a position for a long period.
A position refers to the amount of a stock or financial asset that an investor owns or has sold short. It represents the investor’s exposure to that particular security in the market.
