What is Positional Trading?: Meaning, Strategy, Advantages and More
Recent stats show that nearly 10 million people are now trading online. More people are participating in financial marketing for its accessibility and easy-to-use feature. One popular strategy catching everyone’s attention is position trading. This has been known to give traders higher returns with lower risk compared to other methods. In this blog, we’ll understand what is positional trading, its advantages and disadvantages, strategies for success, as well as possible risks.
Who is a Position Trader?
Position traders are investors who look at the stock market as a long-term investment. They keep hold of stocks for many months or years, expecting to make money when the prices go up. To decide what stocks to buy and sell, position traders check out news stories about companies and use special tools called technical indicators that help them know which ones might increase in value over time. It takes quite a lot of research as well as patience with this strategy because you have to wait a while before seeing results from your investments.
To learn more about Position trading, consider taking an online course on stock market trading strategies. It will give insight into the trading approaches so that you have sound knowledge of each decision made.
Also Read: What is Share Market?
Effective Position Trading Strategy
Position traders employ various strategies for making informed decisions about when and how to buy or sell a given asset.
Breakout Trading
Breakouts occur when prices move above or below previously established areas of support and resistance, potentially signaling the start of a new trend that position traders can look to capitalize on. For example, during the COVID-19 pandemic Zoom shares rapidly rose from just over $100 in March 2020 to around $550 by October 2020.
Support and Resistance
Position traders often watch long-term support and resistance levels as a way to detect changes in an asset’s price relative to its historical trends. For example, the 30,000 mark has been significant for The Dow Jones index since June 2022 due primarily to shifts in supply and demand at that level which can be used by position traders when making trading decisions.
Moving Averages
Position traders often use moving averages because these smooth out the fluctuations of a price chart over its historical period. This provides more accurate signals that can be used for trading decisions. Typically 20-day, 50-day, and 200-day simple or exponential moving averages are watched when looking at long-term trends within markets.
Merits of Positional Trading
It has a number of advantages which includes:
- Positional trading is less risky than swing and day trading due to its long-term element.
- Fundamental and technical analysis can be used in positional trading, making the strategy more effective.
- Large price moves that occur overnight can be identified through this trading.
- It requires less continuous trader involvement compared with swing or day traders.
- Leverage is available when doing leveraged trades as an asset serves as collateral for a transaction.
- It is an investment strategy that seeks to capitalize on long-term growth and can potentially result in large profits.
Demerits of Positional Trading
Positional trading has its pros and cons. On the plus side, it can give you long-term returns on your investments as prices of stocks or other assets fluctuate over time. However, there are some drawbacks too such as
- If you want to position trade, it means you need to have a lot of long-term money to do so. That’s different from other ways of trading which don’t need as much capital.
- To be successful at positional trading, you need to know the key factors that affect how well an asset does. This includes things like supply and demand, market conditions & news events. Doing your research can help give you a better understanding of what affects these assets so that you have more insight into when might be good times to buy or sell them.
- Making mistakes in a long-term trade can be expensive because the amount you have to put aside to stop losses is bigger than when using other methods of trading.
Risks Involved in Position Tradings
When you trade, there’s always a chance something might go wrong. As a trader, it’s important to understand and be prepared for the risks involved in position trading.
- It can result in substantial losses if the trader is unable to predict a sudden shift in trend.
- Leveraged trades can lead to the complete depletion of funds for those who are caught off guard by sharp drops in asset values.
- Without proper consideration of asset allocation rules, traders can be at elevated risk due to putting all their money into one option.
- Those who become overly invested during extended market runs can ignore warning signals that could put them at further financial peril. This might be from holding onto positions too long without selling or cutting back on exposure levels appropriately.
Also Read: What is LTP in Share Market?
Approaches to Position Trading
An approach is the strategy or set of techniques used to achieve a certain goal. Positional trading involves the use of fundamental and technical analyses to identify opportunities with favorable risk/reward potentials. Utilizing this approach, traders can attempt to capitalize on long-term trends by holding positions for extended periods.
Here are a few approaches:
Fundamental Analysis
Fundamental analysis is a type of investment evaluation that involves analyzing the financial metrics and performance indicators of companies to assess their overall long-term prospects. It can help position traders to identify stocks with higher potential for providing positive returns on investments (ROIs). Generally speaking, investors use fundamental analysis when making decisions about which assets are good candidates for investing money into based on underlying economic conditions.
Technical Analysis
Technical analysis is a method used by traders to analyze price movements and trends in the stock market. By using several techniques, and monitoring volume data, technical analysts can identify current trends or potential reversals of these trends before losses. Technical analysis can therefore help traders make informed decisions when investing their money so that they are more likely to earn profits from their investments instead of suffering losses. Like losses due to ignorance about upcoming trend changes happening within certain markets at any given time frame (s).
With regards to using technical analysis in position trades/investments, there are usually two routes one can take. Either trade an asset that has yet to start a trend or one can trade an asset that already began trending. The first one comes with increased risk and the need for more research. Meanwhile, the second needs less research. It also carries its risks of missing out on momentum when massive profits could be made from such trades/investments.
Conclusion
Position traders attempt to make the most of long-term movements in the stock market and gain from possible growth of stocks, by holding them for several months or years. Position trading needs a significant amount of research as well as patience since it can take quite some time before you can get returns. When making investing choices, position traders depend on both fundamental analysis and technical indicators.
