What Is Position Trading?
Position trading is a long-term trading strategy, which involves the position trader holding an asset for weeks or months, rather than hours or days.
This kind of investment offers an alternative to short-term trading options. Although position traders usually keep their position for prolonged periods, they can move faster.
Unlike buy-and-hold investing, position investing allows investors to adopt short and long positions.
Position traders are often thought of as the opposite of day traders. In most cases, position traders make a small number of trades annually.
Rather than buying and selling frequently, most will make around five to 15 trades in a 12-month cycle.
Position trading is sometimes referred to as trend trading, because it works on the assumption that, once a trend emerges, it will continue to gather force for a time.
The aim is to spot a trend, buy, and then wait until the trend peaks to sell.
How Position Trading Works
A position trade is a type of long trade designed to capitalize on trending asset growth. It’s very different from day trading, which takes advantage of short-term fluctuations in prices and share values.
With a position trading strategy, investors can ride out fluctuations in the short term to maximize the chances of making a profit when prices peak further down the line.
In most cases, a position trader will hold their position for weeks, months, or even years. Basically, trading this way combines investing and speculating.
Most position traders have portfolios that contain long-term assets, but some may also choose to put money into short-term options, such as forex trading.
Position traders use data analysis to identify new trends, monitor them, gauge the level of risk, and then use that information to build a position trading strategy.
A good trader needs to be able to determine the right entry and exit points and utilize stop-loss orders effectively. A stop-loss order enables you to set an exit position to manage risks and minimize losses.
The Pros and Cons of Position Trading
There are advantages and disadvantages to every type of trading, including this one.
Pros
- Following a long-term trading strategy to pursue substantial profits
- Less stress and effort for traders, as positions can be monitored more passively
- More time left for other (investment and non-investment) activities than with labor-intensive and time-consuming types of trading
- Lower risk than day trading and swing trading, as investors are not as concerned about sudden, short-term price fluctuations
- Reduce risks with technical and fundamental analysis
Cons
- Requires substantial capital to get started and keep investments running for long periods
- High risk of significant losses if trends reverse
- Limited access to funds in the short-term
- Requires skill to analyze data and asset fundamentals; beginners may wish to seek advice from a position trading firm.
- Costs involved with holding positions for a long time can reduce profit margins..
Position Trading Strategies
Position traders typically utilize fundamental and technical analysis to monitor and evaluate market movements and calculate risks before deciding to buy.
Support and Resistance Trading
Support and resistance trading strategies are designed to establish the best entry and exit points.
The support level is the anticipated minimum price of the asset, while the resistance level is the point at which the asset stops rising in value. To make this strategy work, individuals should focus on:
- Historical prices
- Previous support and resistance levels
- Technical indicators and analysis methods such as Fibonacci retracement, which calculates the golden ratio and helps investors to determine the best entry and exit points
Breakout Trading
Breakout trading aims to capitalize on trends in their early days. To make this system work, traders need to identify periods of support and resistance to time their move right.
Breakout traders go long when stock prices breach the resistance level and go short once the value dips below the support level.
Range Trading
Range trading is most prevalent when the market is moving and fluctuating, and there are no apparent trends. Traders can use range trading to purchase oversold assets and sell overbought assets.
Pullback
Pullback trading provides opportunities for traders to take advantage of dips in market value and plateaus in upward-moving trends.
The goal is to buy when prices decrease and then sell once the upward movement resumes following the pullback.
Additional Considerations
As well as utilizing strategies to calculate risks and identify opportunities, it’s also beneficial for traders to consider additional factors, including the state of the market.
Position trading works best in a bull market, where there are clear trends and movements.
In a bear market, when the market is flat or moving sideways, it’s more difficult to make this type of trading work.
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