Positional Trading Strategy : Benefits, Limitations | Share India (2024)

All forms of trading provide the potential for investors to earn. This tutorial will concentrate on position trading, which entails maintaining a position for a long time to increase the likelihood of generating a profit. This article explores what is positional trading and how it functions, provides advice for creating powerful position trader techniques and lists the benefits and drawbacks for a novice or seasoned investor.

Defining Position Trading

Position trading is a long term trading technique that entails owning an asset for weeks or months as opposed to only a few minutes or hours. There is a substitute for short term trading options in this investment. Position traders might move more quickly even though they often hold their positions for lengthy periods. As opposed to buy-and-hold investing, it enables investors to take both short and long term positions. The perception of position traders being the reverse of day traders is common. Position traders typically do a limited number of transactions annually.

Most people will make between five to 15 trades in a calendar year as opposed to regularly purchasing and selling. Although buy-and-hold trading and position trading have similarities, buy-and-hold trading is more passive, and positions are kept longer to achieve objectives like constructing a retirement investment portfolio. Since it operates on the premise that a trend will continue gaining momentum for a while after it develops, position trading is sometimes called trend trading. To identify a trend, purchase and wait until it reaches its top before selling.

Understanding Method of Positional Trading Strategies

Fundamental Analysis

Fundamental analysis entails delving deeply into a company’s operations. Traders frequently review earnings reports, financial data, CEO remarks, SEC filings, and other documents to do that. Traders may learn about a company’s performance, predicted profitability, and future forecasts by looking at its fundamentals. Traders might use fundamental analysis to analyse whether a stock price appears reasonably priced. Position traders can better grasp long term investors’ perspectives and potential buying and selling decisions by being aware of this.

Technical Assessment

In order to predict a stock’s likely future move, technical analysts examine price and volume behaviour as well as stock chart patterns. If you improve your chart-reading abilities, you will be able to rapidly determine if a stock is in an uptrend or decline by looking at a chart. Also, choose a wise location for your entrance, stop-loss, and more. Chart reading might include searching for really straightforward patterns or more complicated clues. Simple is best. Most of the top traders rely on straightforward and reliable technical analysis. Technical analysis has been practised for many centuries. Many chart patterns and indicators have also been created over that period.

Common Positional Trading Strategies

50-DMA Trading

One of the most crucial indicators for positional trading is the 50-day moving average indicator. The moving averages of the long term patterns are indicated by 50, a factor of both 100 and 200. For positional traders, crossing the 50-day moving average indicator with the 100-day moving average indicator and the 200-day moving average indicator might indicate the start of a new long term trend.

Support and Resistance

Support and resistance levels are important in the stock market since they indicate how a stock’s price moves. Positional traders may use this data to judge whether to initiate or terminate a position on that asset.

Breakouts

Trading breakouts is one of the positional traders’ most well-liked and successful strategies since it heralds the beginning of the next large market swing. Positional traders can use it to help them enter a trade at the beginning of a trend.

Reversal and Pullback Technique

A retreat happens when the direction of an equity’s present price movement briefly changes. Positional traders use the pullback and reversal strategy to capitalise on these market disruptions. Understand what stock trading strategies are and how to create a winning one with our guide.

Advantages of Positional Trading Strategies

• Long Term Plan/Substantial Gains: Compared to intraday trading, position trading is a longer term approach that can provide more significant gains.
• Less Tension: Position trading is far less stressful since it frees up time for other issues by reducing the frequency of position monitoring.
• Additional Time to Search for Possibilities: Trading from a position gives the trader additional time to hunt for new chances. Finding stocks, currencies, or other assets to invest trading capital in falls under this category. They might search for more possibilities for longer term earnings rather than always monitoring or modifying holdings.

Disadvantages of Positional Trading Strategies

• More Capital Expenditure: As trades that persist for several months will force investors to hold capital in that position, it might cost more money to keep a position open for a lengthy period. Also, if your account is insufficient, traders can lose out on other prospects.
• Swap Charges: A position trader must know whether swap costs consume the potential opportunity since they might accumulate over time.
• Lesser Reward: The risk associated with longer term transactions might be lower depending on the trader’s position-sizing strategy. This is because being stopped takes significantly longer, and they need to exercise money management. Getting significant gains with proper position sizing may take some time. Alternatively, if traders commit ‘all in’ to a position, they run the danger of losing everything in their account and locking up a sizable sum of money.

Conclusion

Position traders are not required to monitor their positions in the same manner as other trading methods since they are less sensitive to minor price changes. Instead, they sometimes check in on their holdings to look out for important changes. Positional traders anticipate large potential profits from significant market shifts with an emphasis on long term price fluctuations. Due to this, sometimes deals last for several weeks, months, or even years. Positional traders analyse the markets utilising weekly and monthly price charts, combining technical and fundamental research to identify appropriate entry and exit levels. Also, learn about the differences between intraday and positional trading to choose the trading style that aligns with your investment goals and risk tolerance the best.

Frequently Asked Questions (FAQs)