Position trading is one of the most used trading activities, where investors purchase the stock of the listed company in the hope that the price of the purchased stock will rise in the future. The investor mainly aims to hold purchased shares for the long term. Sometimes investors may also hold short-term positions based on market conditions.
What is Positioning in Trading?
A group of traders called position traders; believes in keeping purchased stocks for a longer period to make big gains instead of running in day trading and making small gains. Position traders generally think of the bigger picture of the stock market. They are not affected by short-term fluctuations that may happen in the market.
Due to their nature of trading, they are considered closer to investors than other traders in the stock market. They expect the market to revive itself from short-term fluctuations and that the stock prices will increase over time.
So, positioning in trading means market commitment or the exposure held by the trader. Position trading is a financial term that can either profit or lose when the assets or securities are realized.
How to Execute Positioning Trading?
Positional traders fall between the day trader and investors. They use several trading strategies that are also used by day traders. They mainly aim to hold purchased shares for longer and sell when the prices increase to gain larger profits than the day traders. Although, there can be a loss if market trends change and stocks do not perform well. Therefore, it’s essential to use the right strategy and analyze the trends wisely.
To avoid any loss or unwanted market conditions, these traders use fundamental analysis and technical trading activities, where technical analysis is a major element of strategies performed by these traders. Also, positional traders are considered passive traders, as they don’t analyze stock performance regularly. Therefore, staying tuned with the latest market trends, patterns, and trading styles is essential.
Benefits of Position Trading
- As traders hold stocks for a long time prior, position trading becomes less risky than day trading and swing trading. The trader also gets a chance to analyze their trade and make necessary changes.
- It’s a reliable form of stock trading because it uses technical and fundamental analysis. It uses both strategies to give better and more reliable insights.
- The more time an interested trader invests in position trading, the more chances they make a profit from sudden changes happening in the market. On the other hand, intraday trading requires accurate buying and selling decisions in a limited amount of time.
- Position trading requires less time and attention than intraday and swing trading. It happens due to long-term factors that give traders proper time to frame their strategy.
Disadvantages of Position Trading
- Traders must lock in the invested money for months and even years. Position trade may also need a considerable amount of capital to buy stock and hold for a long time.
- Strong price swings can cause significant losses if market trends get unfavorable. Thus, one must make an informed decision and decide on investment value wisely.
- There can be swap charges implemented by the broker you use to execute position trading. Mostly these charges become a big amount that investors need to pay timely.
- It may carry low risk compared to intraday and swing trading, but even a single mistake can cause a big loss and demolish the hard work of entire months.
How Does an Investor Identify the Trends?
Traders first analyze the market trend before making any position trade. The trends can be country-specific, industry-specific, seasonal, and even long-term. For example, traders can analyze trends for demand expansion of EVs and renewable energy systems. There can be multiple parameters to compare to find a suitable trend to benefit the trader.
To find out these trends, traders generally use technical and fundamental analysis. Below we have provided some brief information about the same.
Understanding Position Trade Strategy
Position trading is a great way to keep the short-term fluctuation effect away and allow traders to focus on some opportunities to make a big profit. Positional traders mostly ignore the small market trends and use technology and fundamental strategies to execute the trade. Below are some common types of positional trading strategies used by traders.
Support & Resistance Trading
This strategy helps traders figure out the stock’s lower and upper price range. The support level sets the lower price limit, and the resistance level sets the upper price limit. Traders often use historical stock data to identify the support and resistance price levels. This approach visualizes the future price movement of the stock. The price level changes when the breakout takes place.
Pullback and Retracement Strategy
It’s another strategy used by traders to perform position trading. Pullbacks refer to short-term market price movement, which happens when the stock prices move in an upward direction. Here the strategy is to buy the stocks at a low cost and trade at a high. So, the trader enters the market whenever the stock price comes down. And now they avoid trend reversal using Fibonacci Retracement during pullback sessions. Fibonacci Retracement tells the traders the ideal time to open and close their position.
Short Position vs Long Position
Position trading has mainly two types, short and long positions. The long position refers to the condition when a trader buys the stock and its price increases in the future. For example, you purchase shares of Tata Motors at Rs 15,600 in total and expect that the prices of these shares will increase in the future. In this condition, you can say that you hold a long position in Tata Motors.
On the other hand, a short position occurs when the trader thinks the stock prices will decrease in the future. For example, you already have shares of TCS having a present value of Rs 16,000 in total. Soon you realize that the prices of these shares will drop. Thus you sell them in the open market at their current value. And later, you purchase the same number of shares when the price gets dropped to Rs 14,500 in total. As a result, you earn Rs 1,500 profit, and when you sell the shares of TCS, you can say you hold the short position in TCS.
Position trade is tool traders use to hold long or short positions to make higher gains compared to intraday and swing trading. Hopefully, you have understood the meaning of position trading, its benefits, and other terms discussed above. If you still have any doubts, you can comment below.