What Is Position Trading? The Definition, Pros, and Cons
All types of trading offer opportunities for investors to make money, but this guide will focus on position trading, a kind of investment that involves holding a stance for a prolonged period to maximize the chances of making a profit. We will discuss position trading and how it works, offer tips for developing effective position trader strategies, and outline the pros and cons for aspiring or experienced investors.
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. While there are similarities between the definition of position trading and buy-and-hold trading, the latter is more passive, and positions are held for much longer to work towards goals such as building a retirement investment portfolio.
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.
Let’s summarize the differences between trader types:
- Day trader: Buys and sells within minutes or hours
- Position trader: Buys and waits for the trend to peak to sell
- Buy-and-hold trader: Makes long-term investments
How Does Position Trading Work?
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 position 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.
A real-life example of position trading would be the recent movements within the steel industry. Due to closures and limitations of steel plants in China, steel prices soared, and the cost of buying it from manufacturers outside China rose. Position traders would have opened a position in steel outside of China to profit from changes in the industry, which took place over more than a year.
The Pros and Cons of Position Trading
There are advantages and disadvantages to every type of trading. If you are exploring position trading for beginners, it’s wise to learn the pros and cons.
- 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
- 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 vs. Swing Trading vs. Day Trading
Before you start trading, explore different trading opportunities to diversify your portfolio. To do that, you need to learn the difference between common types of trading. Position trading is essentially the opposite of day trading, as it focuses on long-term trends rather than short-term fluctuations, and means holding onto assets for weeks, months, or years.
Swing trading is sometimes considered a middle ground, as these traders usually hold onto their position for days or weeks. Day traders make moves within minutes or hours.
Position Trading Strategies
Position traders typically utilize fundamental and technical analysis to monitor and evaluate market movements and calculate risks before deciding to buy. Position trading strategy examples include:
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 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 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 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.
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.
What is an example of a position in trading?
A position in trading is a trade that has the potential to earn or lose money. When you trade, you can either adopt a short (sell) or long position (buy). If you thought the price of GBP/USD was going to fall, you’d take a short position. If you thought the price would rise, you’d take a long position.
Can you make money position trading?
Yes. Position trading can be lucrative, provided the market conditions are favorable, and you identify the correct entry and exit positions. This type of trading aims to capitalize on trends, focusing on increases in value within weeks, months, or years, rather than hours or minutes.
What is a good strategy for position trading?
There are various strategies for position trading. Most experienced traders use a combination of fundamental and technical analysis, which enables them to spot emerging trends and determine risk levels. Popular strategies include support and resistance trading, range trading, and pullback trading.
Is positional trading more profitable?
Position trading can be more profitable than other types of trading, but success is never guaranteed. Holding a position can be beneficial if trends continue to move upwards, but there is a risk of trend reversal, which can contribute to losses.
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