Position Trading

Position trading is a strategy wherein a trading position is held for a long period (generally weeks or months) to achieve profit. A trader normally has long-term thinking in position trading and holds the position for a prolonged period irrespective of the short-term gyrations.

The positions could be long (buying the asset first) and short (selling the asset first). This form of trading can also be termed trend following, and traders generally use long-term charts (weekly, monthly) to initiate trading positions. Once a trader understands the market patterns, it becomes relatively easy to identify and execute trading strategies while following sound risk management principles.

• Position trading is a trading strategy that involves holding a trading position for an extended period, typically weeks or months, to achieve profit. 
• It is a long-term approach where traders aim to capitalize on the substantial moves of an asset within a longer-term trend.
• Positional trading aims to capture a significant portion of an asset's movement during a long-term trend. Traders aim to benefit from the favorable price changes driven by underlying fundamental factors that impact the asset's value.

Position Trading is a strategy in the financial markets in which the investor takes a view of the investment for long term and put their money into assets like bonds, stocks, commodities, currency, etc. They aim to gain from the price fluctuations of assets in the market and tend to hold on to their positions for days, week, months or longer than that.

Positional traders generally try to capture the juicy part of an asset’s move when it moves in a long-term trend. Most assets, including stocks, follow a pattern wherein they see a movement in price led by a significant change in underlying fundamentals. However, some assets stay dormant for a long period before moving, led by huge changes in their own or industry fundamentals. If these changes affect the industry’s long-term future, the asset price will see an accelerated move for weeks and months before it stops.

Thus, these kinds of traders are not very concerned about price volatility for short term. Their analysis in case of short or long position trading is only for long term. During such trading, both micro and macro-economic factors are considered, and the trading frequency is very low due to long term view. In this way the short-term price fluctuations and covered.

The entire process involves a lot of patience and a strict conviction towards the market and one’s own analysis, because the volatility may influence the buy and sell decision very significantly. The positions are protected from huge losses using techniques like stop-loss.

But this method requires significant amount of capital, which will be kept blocked for a long time because sometimes assets do not show any price movement for may days or months. Thus, it is suitable for investors who have patience and good understanding about the financial assets.

A real-world example from recent history related to short or long position trading could be the steel industry. After China fell heavily on its polluting steel plants, the steel prices shot up significantly, closing many. This closure impacted the global steel supply as China was the steel supplier to the world. Led by this development, steel prices shot up, and so did the price of steel manufacturers outside China.

A positional trader would have taken a position in steel stocks outside China to profit from this change. As the story played out for over a year, this positional trade would have earned handsome profits in the long run.

While there are no standard strategies that traders follow in positional trading, a trader can choose his trades based on his skill set. Generally, traders have a knack for technical analysis. However, some traders put in the extra effort to learn fundamental analysis and use both – technical and fundamental analysis – to make money in trading.

The following are the strategies that one can use in position trading: -

#1 - Technical Strategy:

A technical strategy uses only charts to determine the long-term trend of the asset price. It generally analyses the asset’s price, volume, and relative strength, and trades initiate when the asset price displays a long-term trend behavior. This trading is purely price-led and does not consider any fundamental factors.

#2 - Fundamental Strategy:

A fundamental strategy lays more emphasis on the basic factors that are driving the price of an asset. The plan only considers qualitative aspects and looks for a structural change in underlying business conditions. One important advantage of the fundamental strategy is that the trader can act much more confidently than trading solely based on technicalities.

#3 - Techno-Fundamental Strategy:

A fundamental techno strategy in core position trading uses technical and fundamental analysis to make trading decisions. It uses charts to study price behavior and verify fundamentals to check long-term qualitative change. If the price is in sync with the change in fundamentals, the trade executes.

These strategies generally use technical and fundamental screeners, which help screen the prospective trading bets. Traders can devise entry and exit rules and stop-loss rules while formulating strategies. Traders also need to consider their capital base and market experience while beginning to trade.

As a risk management strategy, positional traders also use stop losses and capital allocation rules not to get wiped out during adverse market conditions. Stop losses in other strategies are generally narrow, while position traders have the liberty to keep wide stop losses to accommodate short-term swings in the markets and asset prices.

Some of the common risks involved in this type of commodity, stock or forex position trading are mentioned below.

• Position trading can deliver huge losses if the trader cannot gauge a sudden change in trend.
• Leveraged trades can wipe out the entire capital of the trader in times of sudden declines in asset prices.
• Some traders do not consider asset allocation rules, which can cost them dearly if they put all their eggs in one basket.
• Many traders get carried away in prolonged market runs and do not cut their position despite witnessing many warning signals. It exposes their capital to more risk.

There are a few advantages and disadvantages of the concept of in core position trading. Let us study the advantages first.

• Positional trading is less risky than swing trading, and day trading because a long-term element is involved.
• Positional trading uses fundamental and technical analysis, making the strategy more foolproof.
• Most big assets happen overnight, and one can capture these moves using positional trading.
• Positional trading requires less continuous involvement of the trader than swing or day trading.
• Availability of leverage is a positive in leverage trading as the asset is available as collateral.

Some disadvantages of the concept of commodity, stock or forex position trading are given as follows:

• Position trading for beginners or advanced level trader requires long-term capital, which is not the case with other trading strategies.
• Position trading requires skills in analyzing the fundamentals of the assets, which many technical analysts do not possess.
• The cost of mistakes is higher in position trading as stop losses are wider than in other trading forms.

• Position trading works best in trending (up and down) markets. One cannot make profits undertaking positional trades in a sideways market.
• It locks up the capital and exposes the trader to liquidity risks.

Trading is a high-risk activity, and traders must train and test themselves before achieving significant market success. Position trading is also the same. One must spend considerable time observing, understanding, and comprehending market movements to learn position trading. The best way to learn position trading is to analyze past data and derive patterns.

The above are two different trading strategies which investors use in the financial market in related to commodities, stocks or forex and both differ from each other in terms of time period, and overall approach to the trading idea, as given below.

• In case of position trading for beginners or advanced level trader, the trader will hold the asset for long term, depending on their analysis and market conditions. But for the latter the time period is short, maybe a few days or weeks.
• The former aims to capture the volatility of prices for longer time frame, unlike the latter.
• Since it is for a long term, in case of the former, the number of trades taken are very few unlike the latter, where trading is done frequently and one or more trades get executed within very short time period.
• Both the types involve analysis using both technical and fundamental tools, but in case of former, the funadamental analysis plays a very significant role, considering company financials, long term prospects, profitability, etc. The latter involves more of technical charts and patterns.
• For position trading, the traders need to be patient and have strong belief on their analysis to stay invested and should be less affected by short term price fluctuations. But the swing traders concentrate mainly quick movements and so need to continuously remain updated.
• Huge capital investment is required for the former unlike the latter which needs comparatively less capital because trading is done in small amounts very frequently.

Thus, the above are some important differences between them.

This article is a guide to what is Position Trading. We explain the strategies, differences with swing trading, examples, risk, advantages & disadvantages. You can learn more about trading from the following articles: -

• Wash Trading
• Calculate Asset Allocation
• Equity Strategies Meaning
• Top Options Trading Strategies
• Holdco