Introduction
Opening Statement
There are many categories of trading styles ranging from very short-term, such as day trading, to the very long-term trading, such as position trading. It is thus possible to deduce that understanding where you stand on this spectrum is critical in the quest for the best approach. Position trading is a strategy that entails holding a particular asset over a long time with expectations of a long-term price trend. It does entail some measure of discipline and the capacity to stick to such investments for the long-term irrespective of some short-term volatility in prices. In this article, the author will discuss in detail about position trading from the essence of the concept, principles, approaches, tools and risks management. Whether a trader is just starting or changing their trading strategy from high frequency to position trading, this guide gives the necessary information.
Trading styles are the strategies that traders use in trading Different trading styles are used in the market depending on the trader’s specialization and personality.
Turnover can be defined in relation to holding period so that traders can be broadly categorized. Speculators who undertake buying and selling of stocks and other financial instruments throughout the day with the intention of making a quick buck on short-term price fluctuations are referred to as day traders. Swing traders maintain the position for several days or weeks with an aim at catching moment swings. Position traders are very long term traders who take positions in days to weeks, months or even years to make profits from big trends. Day trading must be fast and impulsive as it is aimed at seizing short-term opportunities, while position trading involves long-term analysis of market trends.
What Need to Be Known About Position Trading
A lot of new traders get into trading hoping to enjoy the thrill of day trading. It is highly unmanageable, although there are times when it can be financially beneficial for some extremely active and experienced traders. Instead of trading in the short term, most traders would be better off taking the long view. Position trading is less stressful in the sense that one does not have to spend the whole day watching the fluctuations of the price and by the time one is wrong, he or she has gained some profits to offset the losses. It is also important to spend the time to understand whether or not position trading is compatible with your personality, strengths, and goals before attempting to devise a trading plan.
Definition of Position Trading
Position trading is the practice of holding positions with an expectation of holding them for an extended period or until there is a substantial change in the price of the security or asset category. Position traders use both fundamental and technical techniques to look for prospective trading opportunities that may exhibit a solid price trend momentum between weeks to months. To make big money, traders enter larger positions at the time the trend begins and stays with the trade through pullbacks and rallies until the trend has finally exhausted itself. Again, it is not very active, as it is able to hold through normal market fluctuations, one has to have the discipline to adhere to the pre-determined entry, exit and risk management strategies.
How Position Trading is Different From Other Trading methodologies
The major areas of disparity between position trading and other shorter forms of trading include the holding period, the number of trades carried out, the type of analysis done, and the trader’s mentality towards trading.
Day trader holds his position for the whole of the day, while the swing trader might hold his position from a few days to a few weeks. Position traders hold for much longer periods of time say weeks, months and sometimes years. This means position trading involves many fewer trades at any given time. Some traders can trade 20 to 30 trades per day while others trade only a few trades a month or at most 15 a month.
The techniques of analysing the stocks also keep varying – for day traders, they are purely technical and short term, with focus on prices and events of the day. Position traders use higher period technical analysis and incorporate this with the fundamental analysis of longer-term trends in earnings, growth rates and market cycles. This is not just a tactical short-term reactivity, but a more strategic and long-term orientated mindset.
Position Trading, also called position investing, is a basic investment strategy that involves holding shares for an extended period without frequent trading.
Position trading relies on some core principles that guide all aspects from analysis to risk management:Position trading relies on some core principles that guide all aspects from analysis to risk management:
Core Principles
Long-Term Investment Horizon
The minimum amount of time that a trade has to be held is between weeks to months, while there is no maximum time limit on several trades. The decision making needs to allow long-term trends to take root and mature.
Concentrate on the two primary forms of analysis Fundamental Analysis and Technical Analysis
Profound understanding of basic condition of companies and total basic market condition give certain background related to stability and further tendency of main trends. It is used in charting where trends are established and support or resistance levels and time to enter or leave are established.
Patience and Discipline
Giving winning trades time to come usually suggests that the trader needs to stay with his position even if there are signs of consolidation or minor pullback. There must be a strict adherence to position sizing and trade management signals and tactics.
Types of Position Trading
While the core principles stay the same across all position traders, there are some differing strategies and approaches including:While the core principles stay the same across all position traders, there are some differing strategies and approaches including:
Trend Following
Analysing assets that indicate the presence of positive movement of some form, in a certain direction, in expectation of continuation of said movement. May involve breakout strategies.
Contrarian Investing
Investing in stocks that have been greatly sold down and are expected to recover, or investing in nonpreferred securities that are expected to regain their popularity.
Breakout Trading
Going long on a security requires buying at a level that has yielded to prior pressures; buying past key chart levels that have acted as resistance should suffice.
Advantages of Position Trading
The longer time horizon and strategic nature of position trading provides unique benefits:The longer time horizon and strategic nature of position trading provides unique benefits:
Lower Transaction Costs
Thus, conducting a lower number of trades leads to handling considerably smaller commission fees and bid/ask spread costs per trade. Climbing the ladder of multiples over durations brings about more substantial net outcomes.
Reduced Stress
Reducing their frequency helps to avoid interference with short-term price movements and further episodes of positive or negative emotions regarding temporary corrections. Still, a more ‘set and forget’ approach holds profits to allow them to continue accruing.
Potential for Higher Returns
Getting onto larger moves means that one is getting onto trends when they are in their early stages, thus implying that one will be able to hold a larger position size and make larger profits. Profits accrued over months or years accumulate enormously, and the interest accrued on capital also rises considerably.
Disadvantages of Position Trading
There are also drawbacks to the decreased trading frequency and long holding periods:There are also drawbacks to the decreased trading frequency and long holding periods:
Capital Requirements
Swing trading means holding positions for months thus demanding a much bigger capital than intraday trading to absorb margins and other losses.
Increased Market Risk
Periodically, even for long periods, one is prone to shocks that alter the direction of the markets. Holding through volatility also requires mental strength and determination which is a factor in portfolio management. Risk management is crucial to reduce the risk exposure and stop loss discipline can help to minimize the losses that can happen to any trader at any time in the future.
Patience and Discipline Needed
Being disciplined and not moving out of your plan and not getting out of the position before the right time is also very vital for traders. Getting out of your profits while waiting for losses to turn is quite normal without the application of the rules.
Position trading is a long-term investing strategy based on identifying long-term trends and supportive technical patterns in a stock.
While traders might specialize in trend following, contrarian or breakout strategies, incorporating elements across these approaches is common:While traders might specialize in trend following, contrarian or breakout strategies, incorporating elements across these approaches is common:
Trend Following
What position traders are able to do, is enter at the top or the bottom using technical indicators when an emerging trend is first identified – known fully. Other trends or the overall market can offer clues as to sustainability.
Breakout Trading
Identifying levels in a chart that act as support or resistance is helpful in providing useful information on where to enter a trade. Taking out the volume while trading breakouts affirm genuine breakouts.
Contrarian Investing
In particular, sentiment tools are used when a major index goes too high because of euphoria or too low because of panic, to find conditions for an extension beyond regular corrections.
Identifying Position Trading Stocks
Determining which stocks align with the overall market outlook begins with analysis across 3 key areas:Determining which stocks align with the overall market outlook begins with analysis across 3 key areas:
Fundamental Analysis
Evaluating sales growth rates, trends in earnings in relation with peers, P/E ratios, profit margins over longer periods provide performance information.
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