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Definition of Position Trading

Position trading is a strategy in which a trading position is held for a long time (usually weeks or months) to achieve the profit target. In position trading, a trader typically thinks long term and the position will be held for an extended period of time regardless of short term rotations. Positions can be in (buy asset first) and short (sell asset first). This form of trading can also be referred to as trend following and traders typically use long term charts (weekly, monthly) to initiate trading positions.

How does position trading work?

Position traders usually try to grab the juicy part of an asset’s movement when it enters a long-term trend. Most assets, including stocks, follow a pattern, where they see a price trend driven by a significant change in the underlying fundamentals. Some assets sit dormant for a long time before they start moving, driven by huge changes in their fundamentals or industry fundamentals. While these changes affect the long-term future of the industry, asset prices experience an accelerated movement for weeks and months before stopping.

Example
A real example from recent history might be that of the steel industry. Steel prices have risen dramatically after China sharply cut polluting steel plants, shutting down many. This closure had an impact on the global steel supply, with China being the global supplier of steel. Driven by this development, steel prices rose, as did the prices of steel producers outside of China.

A positional trader would have taken a position in steel stocks outside of China to take advantage of this change. As the story has been going on for over a year, this positional trading would have generated substantial long-term benefits.

Position Trading Strategies and Techniques

Although there are no standard strategies that traders follow in position trading, a trader can choose their trades based on their skills. Typically, traders have a knack for technical analysis. Some traders go the extra mile to learn fundamental analysis and use both technical and fundamental analysis to make money in trading.

#1 - Technical Strategy:

A technical strategy uses only charts to determine the long-term trend of the asset’s price. It usually analyses the price, volume and relative strength of the asset and trades are initiated when the price of the asset exhibits long-term trending behaviour. This trading is purely price driven and does not take into account any fundamental factors.

#2 - Fundamental Strategy:

A fundamental strategy puts more emphasis on the fundamental factors that determine the price of an asset. The strategy only takes into account qualitative factors and aims for a structural change in the underlying economic conditions. An important advantage of fundamental strategy is that the trader can act with much more confidence than if he is trading solely on the basis of technical aspects.

Techno Fundamental Strategy:

A techno fundamental strategy uses a mixture of technical and fundamental analysis to make trading decisions. Use charts to study price behaviour and check fundamentals to study long-term qualitative changes. If the price is synchronized with the change in fundamentals, the trade is executed.

All of these strategies generally use technical and fundamental controls, which help control potential trade bets. Traders can design their entry and exit rules and stop loss rules while formulating their strategies. Traders should also consider their capital base and market experience when starting to trade.

As a risk management strategy, positional traders also use stop loss and capital allocation rules to avoid being blown away during adverse market conditions. Stop losses in other strategies are generally limited, while position traders have the freedom to maintain large stop losses to accommodate short-term fluctuations in markets and asset prices.

Risks of Position Trading

  • Position trading can lead to huge losses if the trader is unable to assess a sudden change in trend
  • Leveraged trades can wipe out all of a trader’s capital in the event of a sudden drop in asset prices.
  • Some traders ignore the rules for asset allocation, which can cost them dearly if they put all their eggs in one basket.
  • Many traders get carried away by the prolonged market runs and do not reduce their position despite having witnessed many warning signs. This exposes their capital to greater risk.

Advantage

  • Position trading is less risky than swing trading and day trading
    because a long term element is involved

  • Position trading uses fundamental and technical analysis, which makes the strategy more foolproof

  • Most major Asset movements happen overnight, and these movements can be captured using positional trading

  • Position trading requires less continuous trader involvement than swing or day trading

  • The availability of the effect of Leverage is positive in leveraged trading because the activity is available as collateral

Disadvantage

  • Position trading requires long-term capital, which is not the case with other trading strategies

  • Position trading requires fundamental asset analysis skills, which many analyst technicians do not have

  • The cost of errors is greater s high in trading positions such as stop l and p losses are greater than in other forms of trading
  • ¬†

Limitations

Position trading works best in trending (high and low) markets. Profits cannot be made by placing positional trades in a sideways market.
Freezes capital and exposes the trader to liquidity risk .

Conclusions

Trading is a high risk activity and traders need to practice and challenge themselves before achieving significant success in the market. Position trading is also the same. If one is to learn position trading, one must spend a lot of time observing, understanding and understanding market movements. The best way to learn to trade a position is to analyse  past data and derive patterns. Once a trader understands market trends, it becomes relatively easy to identify and execute trading strategies while following sound risk management principles.

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