- HDFC
- 03 Jan 2023
- Equity Product
HDFC, Tester
In the stock market, there are several ways in which a trader or investor can make money. One can deploy different strategies with the help of fundamental analysis or technical analysis tools. It is a well-known fact that investing can help one to generate wealth over the long term with lower risk, but at the same time, trading can be a lucrative way to generate quick returns in the short term.
A trader can apply different trading strategies depending on his risk appetite, financial objectives, skills, available resources, etc. Some common trading strategies are intraday trading, positional trading, swing trading, scalping and momentum trading, among others. Let us understand in detail about positional trading in stock market.
What is Positional Trading?
Positional Trading is a trading strategy in which a trader purchases a security in anticipation that its price will rise in the long term. A positional trader holds on to the position for a few days to a few months until their long-term view on the stock or the security changes.
The short-term market fluctuations or daily price swings are ignored in the positional trading strategy as it focuses on the long-term trend. While day traders utilise the daily price movements to generate profits, positional traders play their game over a longer time frame.
For example, a trader believes the price of XYZ stock to increase over the next few weeks. In this case, he buys and holds XYZ shares for the long term. The trader will exit the positional trade as and when the exit criteria are met.
Positional traders remain invested in their stocks for a long period. To generate higher profits, the positional trading strategy must determine the entry and exit points and make an accurate plan to identify emerging trends.
Position traders use both, fundamental analysis as well as technical analysis, for trading. Fundamental analysis is used to select stocks with high growth potential for investing. The entry and exit points are determined with the help of technical analysis. Moreover, in this strategy, it is important to understand the market trends, analyse the chart patterns and utilize different indicators.
Here are some things a trader should know.
Risk management
Managing your risk is one of the most important things in the stock market. A trader should know their risk profile before taking on a trade. The risk profile refers to the amount of money a trader is willing to risk on a particular trade. Knowing your risk profile will help one to carefully select their position sizing and systematically manage their trades.
Research and analysis
Before taking on a positional trade, it is important to research the positional stock. A trader should carefully analyze the factors that might affect the stock during the duration of the trade. Instead of blindly following tips, a trader should do their own research and analysis to make sound trading decisions.
Factors affecting the stock
The risk involved in positional trading is more as the stock is held over a long time. Global events or any other external factors can increase volatility in the market. This can lead to significant changes in stock prices. Therefore, it is crucial for a trader to consider these factors before taking on a trade.
Stock selection
It is important to spend time contemplating the stocks to invest in. Many traders choose to trade in penny stocks, but these stocks are often volatile and have weak fundamentals. Newer traders in the stock market should preferably trade in blue chip companies as they are less volatile and fundamentally sound.
Strategy
It is advised that a trader has a strategy and plan in place while taking on a positional trade. A trader can make use of price action or technical indicators to devise a strategy. With proper risk management, traders can also capitalize on recent or upcoming events related to the positional stock.
