Position Trading Strategies
In the timeline of trading, time bound strategies like scalping and day trading involve short durations. On the other hand, the absolute long term form of trading involves positions held for a much more extended period of time. This can be for months together and even years, if required. Such holding of positions for much longer periods are called position trading.
What Is Position Trading?
Position trading is very similar to investments but differs in some aspects too. You buy into an asset with the intent to hold on to it for an extended period. The focus is on the appreciation over a longer duration which could be from weeks to months and even years.
This could be quite similar to investment but the difference lies in the position trader’s approach to ultimately plan an exit when the timing is right.
Approaches Taken In Position Trading
As with investments, position trading also involves a highly research-oriented and analytical approach. The longer duration of a position taken up and holding it for an extended period demands continuous and detailed monitoring.
For this, the trusted analytical tools used in all forms of trading come in handy in position trading too. Here is a look at how fundamental and technical analysis becomes useful here.
Fundamental analysis is a tool used widely in investment as it focuses on the inherent state of an asset and how it can help in ascertaining the right price to acquire, hold and finally sell. This analysis dissects the various aspects of the security’s aspects, wellbeing and value to make decisions.
Technical analysis uses an approach to plot trends based on historical data to identify opportunities in price movement to enter a position or assess the duration to spend till exiting it. This helps a trader understand trend patterns and plan for maximising gains and alert to any possible reversals in the trend and minimise risk. Whether using the analysis to take up a position on an asset with potential to trend or enter the one that is already trending, using technical analysis is a powerful trading tool.
How Does It Work?
The approach to the actual trade and the duration is the same as with investments. But, when investing, you buy into an asset with the intent of ownership and enjoying the benefits that come with it. Dividends and other corporate action like bonus and rights issue in the case of stocks are rewards that investors look at.
In position trading too, such benefits that accrue by way of owning an asset like a stock are useful. But, as a position trader, the real objective is to reap the gains from the increase in valuation of the asset over the holding period.
Position traders rely heavily on technical analysis that gives useful insights into the market sentiment. The use of technical charts, in particular, helps a trader plan his moves on getting into, retaining and squaring positions.
To make position trading really work, you need to get a good grip on how to read and understand the signals sent out by the market. These can be trends and patterns that indicate the direction of the value or the price of the asset.
Position Trading Strategies And Techniques
A simple explanation of position trading is that it is a long term form of trading and almost similar to investments. But it is anything but simple, given its dependency on using an analytical approach and employing specific strategies and techniques.
More than watching out for momentary price surges or blips and reacting to pockets of volatility, position trading is about analysing the longer term performance of an asset. For this, there is the need for a proper, tested strategy that has its basis on data and analysis.
Here is a round-up of the major, popular strategies traders often use in position trading.
➣ EMA crossover - 50-Day Moving Average Indicator and 200-Day Moving Average Indicator
The most important indicators in positional trading are the 50-day moving average indicator and the 200-day moving average indicator. Both are popular time frames and the price closing above is considered to be a strong signal to react on. Usually, the stop-loss is placed just below the most recent swing down.
➣ Support and resistance trading - buying low and selling high
Support and resistance lines can help traders recognise the range of a moving asset price. While support creates a lower limit of price, resistance constitutes the upper level. Periods of significant gains and losses are indicators for future price movements. At the same time, previous support and resistance levels can also signal how asset price has moved.
➣ Breakout trading
Here, the traders look for periodical support and resistance levels. The trader enters a long position, when the overhead resistance is broken. On the other hand, the trader enters a short position when the price breaks out of the support line.
➣ Pullback and retracement
Market reconciliation can happen when the market is rising upward. The idea is to look for pullbacks and plan an entry. When the price goes down during pullback, traders enter the market.
But what happens if a trend reversal happens during pullback? This is where traders use Fibonacci Retracement to help them identify when to open or close position.
➣ Range trading
There are times when an asset may not take a definite direction in its price movement. Instead, the price could fluctuate to hit highs and lows without any set pattern. This lack of a trend can help a trader be on the lookout to buy assets at bargain prices or sell those that are overbought.
Benefits Of Position Trading
With its longer duration, position trading allows a trader to switch strategies and exit a position earlier. This flexibility to convert from a longer to a shorter trading position can be of use in certain situations that warrant an early liquidation of an order.
Obviously, this empowers the trader to identify the best, most profitable point to exit. But it also helps mitigate risks in cases where a certain buy or sell made threatens to be a bigger loss.
When compared to the frenzied pace and high volumes seen in shorter duration trading, position trading demands much less time and attention. This is understandable as the actual trades are lesser and quite spaced out. Of course, a trader will have to constantly follow up on the developments of the asset. But that still is much less hectic as the constant tracking and trading are done by day and even swing traders.
Risks Of Position Trading
In position trading, traders take up positions for a much longer duration with the research and expectation of a gradual build up in the value and trading price of an asset. There is a much longer gestation period where the investment stays blocked.
There can be a counterargument that an investment held for a longer duration can, eventually, reap a higher profit. But, from a risk perspective, a bad call or unforeseen and sudden adverse developments can wipe profits and even result in losses.
Also, the slower pace of position trading is obviously not suited to investors and traders looking for constant action in the trading ring and quick results. This calls for a different kind of temperament in a trader and maybe closer in nature to investments than conventional trading.
If you are a beginner who wants to explore positional trading, these strategies will help you make smart moves and gain confidence.
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