What is Positional Trading? What are the Pros and Cons of Positional Trading Strategies?
Positional Trading: An Overview
One of the most lucrative investment alternatives available worldwide is stock trading. Every day, millions of investors and traders visit stock markets to test their luck and trading abilities. Others lose money in the market while others who know the trade secrets make enormous riches.
Based on their financial objectives, stock trading preferences, and the time they want to hold their investments, stock market traders frequently select one of the various trading techniques available. Short-term and long-term trading are the two main types of trading. Newcomers often have no idea what kind of stock trading is right for them. So, to help one get started here is a glance inside the strategies of positional trading.
What is Positional Trading?
Positional trading means that the trader purchases an investment in the hope that its value will increase over the long run. Unless they change the trader's long-term perspective on the position meaning in stock market, this sort of trader is less bothered by short-term price swings and the day's news.
What is positional trade?
When an asset moves in a long-term trend, positional traders often attempt to catch the most profitable portion of the move. The majority of assets, including stocks, exhibit a pattern whereby a large change in the underlying fundamentals drives a shift in price. However, some assets remain inactive for a while before moving as a result of significant adjustments to their own or the industry's fundamentals.
Position traders may be thought of as the polar opposite of day traders. They don't trade frequently; the majority make less than 10 deals annually.
Is Position Trading for You?
Using position trading, you can profit from the short-term fluctuations of a stock. It can be a good strategy if you want to quickly trade in and out of stocks, but it's not for everyone.
Positional Stock Trading Strategies
Despite the fact that there are no established tactics for positional traders to use, a trader can select his bets according to their skill set. Traders typically excel in technical analysis. In order to make their analysis significantly more reliable, traders often put in the extra effort to learn fundamental analysis along with technical analysis. Following are the strategies that a trader can apply to their positional trading technique:
- Technical Strategy: To ascertain the asset price's long-term trend, a technical strategy relies solely on charts. Stocks, bonds, futures, and currency pairings are just a few examples of tradable instruments that are often susceptible to forces of supply and demand and may be predicted using technical analysis. In fact, some people think that technical analysis is just the study of supply and demand dynamics as they manifest themselves in changes in a security's market price. The most typical application of technical analysis is price fluctuations, although some analysts also keep watch on other metrics like trade volume or open interest levels. Fundamental considerations are not taken into account in this trade and are solely driven by market conditions.
- Fundamental Strategy: A fundamental strategy places more attention on the underlying variables influencing an asset's price. The strategy solely takes qualitative factors into account and seeks a structural shift in the fundamentals of the business world. The fundamental analysis assesses the value of a stock or any other kind of investment using publicly available data. In order to ascertain a company's underlying worth and potential for future growth for stocks, the fundamental analysis considers statistics such as sales, earnings, future growth, return on equity, profit margins, and other factors. The financial accounts of a corporation contain all of this information. To determine a fair market value for a stock, analysts often first assess the overall health of the economy, followed by the competitiveness of the industry in question, and finally the performance of each individual company.
- Techno-Fundamental Strategy: A techno fundamental approach makes trading decisions based on both technical and fundamental analysis. Charts are used to examine price behavior and confirm fundamentals in order to monitor long-term qualitative development. The transaction is executed if the price reflects the fundamental shift. These tactics often include technical and fundamental screeners to aid in the selection of potential trading bets. When creating strategies, traders may create entry and exit rules as well as stop-loss rules. When starting to trade, traders should also take their capital position and market experience into account.
Positional traders also utilize capital allocation rules and stop losses as a risk management tactic to avoid losing everything during volatile market circumstances.
Potential Downsides of Positional Trading
- Some traders fail to take asset allocation guidelines into account, and if they do not diversify their investments, it might result in significant losses.
- If the trader is unable to anticipate a swift shift in trend, it can lead to positional trading meaning significant losses.
- Many traders lose control during extended market runs and fail to liquidate their positions despite many warning signs. It increases the risk to their capital.
- When asset values suddenly drop, leveraged transactions have the potential to completely drain the trader's funds.
How is the trend identified?
Averages show patterns.
Moving averages filter out noise and price activity without getting overly complicated. Standard SMA periods are 20, 50, and 200.
Identify support and resistance. Buyers enter when the price goes below support. Sellers leap in when prices break resistance. Identifying significant zones may help traders avoid overbought or oversold conditions and boost confidence when stopping losses and taking profits.
Pros of Positional Trading Strategies
- Due to the long-term component, position trading is less dangerous than swing trading and day trading. Traders get a chance to review their investments in order to make changes according to the changes in the market.
- Positional trading makes the method more reliable by utilizing both fundamental and technical analysis. It aggregates both strategies in order to provide a more reliable and analytical approach to evaluating stocks.
- Leverage is readily available, which is advantageous in leveraged trading since the asset may be used as collateral.
- The majority of large asset movements occur overnight, and positional trading may be used to profit from them. The more time a trader is invested in a stock, the more chances they have to benefit from a sudden surge in the stock price, whereas in day trading one has to be very accurate with the timing of entering and exiting a particular trade.
- Compared to swing or day trading, position trading demands less constant attention from the trader. Positional trading, because of the long-term factor, allows a trader to monitor prices in a comparatively less frequent time frame.
Cons of Positional Trading Strategies
- As transactions might persist for several months, traders are required to lock in the money. A large amount of cash is required to maintain positions open for an extended period of time.
- Large deposits are required since it is impossible to trade positions with little money. Strong price swings consequently increase the likelihood that the invested funds will be completely lost.
- Swap charges can add up to a significant sum if the position is held for a long time. Swap charges refer to the cost levied by the broker for enabling a trader to hold their positions open for a rollover to the next trading session.
- Position trading carries a far lower level of risk than daily or swing trading, but a mistake might prove lethal. A trader who trades against the trend risks losing both their initial investment and the time they spent.
Passive Investors vs. Position Traders
Passive investors are not concerned with the direction of the market. They are more interested in making a good return on their investment and will buy stocks regardless of how they are doing at any given time.
Position traders, on the other hand, can make or lose money based on where their stock is currently trading. For example: If you think a particular stock will go up over time, but it's currently going down, you'll want to sell it before it goes even lower (since your prediction was likely incorrect).
Positional Trading Strategies
Positional trading. Positional traders use technical analysis to forecast price increases. When the trend shifts, individuals may invest in making money.
After deciding on position-based trading, choose a market (s). To do so, you must know how each asset performs under certain conditions and whether those markets are now experiencing them. Gold performs well amid economic instability and slow growth (like now); therefore, include it in your portfolio. If inflation drops tomorrow, stocks may be a better investment.
50-Day Moving Average Trading
Traders use the 50-day moving average to gauge an asset's price. An asset's price is above its 50-day moving average in an uptrend. An asset's price is below its 50-day moving average in a downtrend.
This approach identifies long trades during uptrends and short trades during downtrends. Say you want to purchase Apple today (AAPL). Use the 50-day moving average trading approach by comparing AAPL's current price to its historical closing prices over the last 50 days (more than five weeks). Buy shares if AAPL's price exceeds these half-year closing levels.
Support and Resistance Trading
Horizontal lines indicate long-term support and resistance. They buy and sell stocks.
Resistance and support
Horizontal prices are simple to identify.
Timeframes are essential on higher timeframes (daily, weekly) since they impact the overall chart.
Pricing analysis (both up and down). If your stock has been falling and suddenly goes up on business model news, it may imply support where there was resistance. If two stocks demonstrate similar patterns over time, it may make sense to use one as a proxy for another since their patterns should follow each other closely no matter which one(s) we're looking at independently.
A breakout strategy identifies an extreme in one direction and exploits the following price movement. Buying when prices break above or below a level and selling when they retrace are popular variants.
If you anticipate the market will rise and wish to trade breakout strategies:
Time frame trends (day trading versus long-term).
Choose the price's direction (upward breakout on a downtrending chart).
How far from support/resistance breakouts are will determine your risk.
Trade when the price reaches the target zone. When the price reverses its initial move, exit the transaction (downward breakout on an up-trending chart).
Pullback and Retracement Strategy
Pullbacks follow trends. Pullbacks and retracements may be up or down and frequently follow a long trend.
At the start of an uptrend, the market rises slowly. Once it approaches higher resistance, sellers force prices down to retest before rising support levels. This is a retreat because prices go below their prior high.
In downtrends, the market falls steadily until it finds resistance at its lower border, then buyers drive prices back up to prior support levels.
Trading is a high-risk activity, thus before seeing considerable market success, traders must test and train themselves, and position trading is no different. To study position trading, one needs to invest a lot of time in monitoring, learning, and interpreting market movements. Analyzing historical data and identifying patterns is the greatest approach to learning position trading. It becomes quite simple to design and carry out trading strategies while adhering to basic risk management guidelines once a trader comprehends market trends.
What is position trading’s best indicator?
When using technical analysis in order to evaluate stocks for positional trading, one has to consider which indicators, to use in order to analyze the charts reflecting price movements. The best of these indicators that help a positional trader in technically analyzing the stocks are:
- Support and Resistance Levels
- Exponential Moving Average (EMA)
- Fibonacci Retracement
- Stochastic Relative Strength Index (Stochastic RSI)
What are some other trading strategies that help traders amass high returns?
An active trading strategy can be implemented in a variety of ways, each with its own risks and acceptable market conditions. The most commonly used trading strategies used by traders to earn high returns from the stock market are as follows:
- Day Trading
- Positional Trading
- Swing Trading
How is positional trading different from day trading?
Position trading may be seen as the complete opposite of day trading, which mostly capitalizes on momentary market movements. Day traders seldom keep positions overnight and instead try to acquire and sell a variety of assets with the goal of closing them before the conclusion of the trading day.
Is positional trading suitable?
Positional trading is buying and selling stocks based on their market position. A stock is considered "long" if the investor has purchased it with the intent to hold it for an extended period, and a stock is considered "short" if the investor has sold it with the intent to buy back at a lower price in the future.
Which indicator is best for positional trading?
Many indicators can be used for positional trading, but some are better than others.
The best indicator for positional trading combines the Relative Strength Index (RSI) and the Average Directional Index (ADX). Still, other indicators can be used as well.
Is positional trading better than day trading?
The term "positional trading" refers to a trading strategy focusing on holding a position for a long time rather than day trading. The investors who use this strategy believe it is more profitable than day trading.