Positional trading is the long-term trend-following approach where traders hold onto their positions for more than a day, weeks, or even months.
Positional trading varies with pertinent market environments and risks. Instead of looking forward to short-term price movements, positional traders try to grasp and take out profits from longer-term trends. Positional trading is quite similar to investing.
However, the main difference is that the buy-and-hold investors are restricted to just going long. Accurate technical analysis coupled with multiple trading styles is key to result-oriented trading in the stock markets.
Let us understand positional trading and some commonly used positional trading strategies.
What Is Position Trading?
The position trading strategy enables the trader to hold and carry their position for a longer period in the stock period than intraday trading. This period can range from a day to a week and even a month or more, depending on the trader’s trading goal.
In other words, position trading does not have a particular period. Rather, the period can be decided according to the nature of the deal.
Look at the chart above, showing the market trend of Cipla Ltd. In this case, a positional trader would not consider the ups and downs between December to March, deemed as short-term movements. Instead, the trader would look forward to capturing profits from longer-term trends, evident in the movement after March.
The significance of positional trading has increased over the years. A crucial reason is that positional trading evades one of the most considerable risks of intraday trading: leveling out a transaction before the trading session ends.
5 Position Trading Strategies Beginners Can Use
Positional trading strategies help remove short-term fluctuations in the market, enabling a positional trader to focus on a substantially broader view. As positional traders disregard small changes in the trend, they need to follow strategies based on strong rationality and analysis.
Now, let’s consider the following strategies.
Support and Resistance
Support and resistance are two particularly crucial levels in the markets. These levels suggest where an asset’s price movement is going. Therefore, these levels indicate positional traders regarding opening or closing a position on that specific asset.
The trader discerns and assesses the chart patterns to execute this strategy. The previous support and resistance levels generally indicate the future levels.
There is a common observation that the movement that breaks a resistance level after that becomes a future support level. Besides, dynamic support and resistance levels are given by technical indicators such as Fibonacci retracement.
Fibonacci Retracement assists position traders to recognize when to open or close a position. They draw Fibonacci Retracement lines on the price chart at 61.8, 38.2, and 23.6 per cent and then use them to specify support and resistance lines, ultimately spotting trading opportunities.
In a breakout trading strategy, a position trader waits for the movement to go beyond the predefined support or resistance level. So, the trader gets into a long position when the overhead resistance is crossed.
Contrarily, position traders enter a short position if the price crosses the support line. A trader highly proficient in recognizing periodical support and resistance levels can leverage this trading strategy.
The breakout trading strategy is one of the most commonly used and beneficial strategies for position traders. The reason is that this strategy specifies the opening of the next major movement in the market. This helps the positional traders enter a position in the initial stages of the trend in the financial market.
50-days and 200-days EMA Crossover
50-days and 200-days EMAs are regarded as the most-suited moving averages (MAs) in the positional trading strategy. Positional traders seek trading opportunities when the MA lines cross one another.
When the fast-moving MA crosses the slow-moving MA line below the point of intersection, it is known as the golden cross. A golden cross demonstrates a bull market going forward.
Contrarily, when the 50-day MA crosses the 200-days MA from above, it implies a bear market. In both cases, the point of intersection is called the death cross.
However, MAs are lagging indicators. To put it better, by the time the crossover occurs, the trend reversal has already happened. Positional traders incorporate the stochastic Relative Strength Index (RSI) with MA lines to rectify this problem. Stochastic RSI infers evaluating RSI using the stochastic formula.
When positional traders integrate MA lines and stochastic RSI on their trading charts, the stochastic RSI provides an early indication of a golden cross being formed before the MA crossover occurs. This suggests opening a bullish trend in the stock market when the stochastic RSI goes beyond the 20-level. Still, the signal needs to be confirmed before further reactions to it.
For this reason, the positional traders seek prices to break and close above the 200-days EMA in the stock market. The 200-days EMA is deemed one of the most powerful MAs in positional trading; price closing above the 200-days EMA is considered a powerful signal to react on. The stop-loss is set below the most recent swing down in a trade carried out using this positional trading strategy.
Pullback and Retracement Trading
Whenever there is a brief reversal in the prevailing price trend of an asset, it is called a pullback. Positional traders enforcing the pullback and retracement strategy look for capitalizing on these pauses as trading positions.
The primary aim of this strategy is quite straightforward — buy at a lower price and sell at a higher price before the market dips for a short duration, and then buy again at the subsequent low level. Besides helping the positional traders to get profits in the long term trends, this pullback and retracement strategy helps resist the possible market losses.
Position trading also involves using various retracement indicators, such as Fibonacci retracement. When the price drops during a pullback, positional traders enter the market, and in order to remove the odds of trend reversal when the pullback occurs, they use Fibonacci Retracement.
Positional traders use the range trading strategy when the price of an asset fluctuates between periodic highs and lows without any noticeable trend. These traders use price range methods to recognize oversold assets to buy and overbought assets to sell. In other words, this position trading strategy spots a range in which the investor buys and sells over a brief period.
To understand this in a better way, assume a stock that is trading at ₹3,500, and you feel it will increase to ₹3,800, then trade in a range of ₹3,500 to ₹3,800 over the next weeks. The trader may try to range trade by buying the stock at ₹3,500 and then selling it if it increases to ₹3,800. The trader might repeat this process until they feel the stock will no longer trade in this range.
Advantages of a Successful Position Trader
When a trader utilizes these commonly used position trading strategies with adequate experience and proficiency, position trading can be an incredible trading style.
The main advantage of position trading is that it offers the trader the leeway to use many trading styles. As per the ongoing market trends, the trader can carry out intraday and swing trading with positional trading.
Position trading also lets the trader leverage the large movements in the stocks for weeks and months. Moreover, making it a great alternative to intraday, position trading can be done without staying glued to the screen for the entire trading session. It needs the least time if the trading plan is based on proper research.
Disadvantages for Position Traders
Like all trades, position trading is also subject to risks in the market. Some of the most seen risks are low liquidity and trend reversal risks.
Whenever there is an abrupt reversal in the trend of an asset’s prices, it causes significant losses for the positional trader.
Position trading also needs the investor to block their money for longer times. Consequently, it is advised to have their risk profile analyzed before getting into positional trading.
Who can use Positional Trading?
All market participants should match their trading styles with their personal objectives. Note that every style comes with its set of advantages and disadvantages.
Think of the reason you are trading in the first place.
Do you want to save money for the future?
Do you plan to make trading a source of earning?
Or do you just like playing in the market and want to own a portion of a company?
Also, how much time can you commit each week or each day to tracking your portfolio?
Position trading perfectly suits a bull market with a strong trend. It does not easily suit a bear market. During a time in which the market is flat, moves sideways, and simply sways around, the day trading strategy might be advantageous.
The Key Takeaways
As position traders are not uptight with minor price fluctuations, they do not need to oversee their positions the same way as other trading strategies. Rather, they occasionally monitor their positions, keeping an eye on major trends.
With a focus on long-term price movements, positional traders look forward to high potential profits to be obtained from dominant shifts in prices. As a result, trades commonly extend over weeks, months, or even years.
Positional traders use weekly and monthly price charts to examine the markets, using technical and fundamental analysis to recognize reasonable entry and exit levels.