If you have ever thought about trading stocks but worry about watching prices all day, positional trading might be a suitable solution for you. Unlike day trading, positional trading allows you to adopt a more long-term approach to trading. In this article, we will take a closer look at positional trading, what it means, along with some easy-to-follow strategies, and while also understanding the pros and cons of positional trading.
Table of contents
- What is position trading?
- Types of Positional Trading
- How to Select Stocks for Positional Trading
- How is the trend identified?
- Passive investors vs. position traders
- Advantages of position trading
- Limitations of position trading
- Positional stock trading strategies
- Potential downsides of positional trading
- How to trade using positional trading strategies
What is position trading?
Positional trading means buying stocks and holding them for weeks, months, or even years, to benefit from potential long-term price movements. Unlike day traders who buy and sell within a single day, positional traders patiently may wait patiently for relatively larger price movements.
In simple terms, this is how positional trading works:
- You buy a stock with the expectation that its price may rise steadily over time.
- You hold the stock until your target price is reached or you decide to exit the position.
- Trades usually last from several weeks to several months or longer.
Positional trading is a style that may suit traders who have a longer-term view of the markets and prefer not to make frequent trading decisions based on constant monitoring.
Types of Positional Trading
Positional trading can be approached in different ways depending on how you analyse the market and choose your investments. Here are some common types of positional trading strategies:
Futures and Options Positions
In this approach, traders use derivative instruments such as futures and options to take positions for a limited period, which may last up to a few months. While this method could offer higher return potential, it also involves higher risk due to market volatility and the use of leverage.
Long-Term Equity Holding
This strategy involves buying shares of fundamentally strong companies with the aim of benefiting from potential price growth over time. Traders usually hold these positions for several months or longer based on their view of the company’s future performance.
Thematic Trading
In thematic trading, positions are taken based on broader market trends or sectors that are gaining attention, such as renewable energy or new technologies. The idea is that these trends may develop over time and could potentially lead to favourable price movements.
How to select stocks for positional trading
Choosing the right stocks may help you make more informed positional trading decisions and manage risk more effectively:
- Look for stocks that show a clear and consistent price trend, as this may indicate sustained market interest.
- Focus on companies with strong fundamentals such as stable earnings, manageable debt levels, and sound business models.
- Consider stocks with adequate trading volume to help ensure smoother entry and exit from positions.
- Analyse broader sector performance, as stocks in strong or emerging sectors may have better growth potential.
- Use basic technical indicators such as moving averages or support and resistance levels to identify potential entry and exit points.
- Pay attention to overall market conditions, as trends tend to be more reliable in stable or directional markets.
- Avoid stocks with excessive volatility, as unpredictable price movements could increase risk.
Read Also: Stock Market Trading: Meaning, Types, and Historical Context
How is the trend identified?
To succeed in positional trading, identifying the trend is key. Here’s how traders may identify trends:
1. Moving averages
- Simple lines that show the average price of a stock over a specific period — say 50 days or 200 days.
- Positional traders often use the 50-day (short-term trend) or 200-day (long-term trend) moving averages.
- If the price consistently stays above the moving average, it may indicate an uptrend, while staying below may suggest a downtrend.
- Traders often watch for crossovers (like the 50-day moving above the 200-day), which may indicate a trend reversal.
2. Trendlines
- These are straight lines drawn on a chart by connecting a series of higher lows (in an uptrend) or lower highs (in a downtrend).
- They help visually spot the stock’s direction and can also act as dynamic support or resistance levels.
- A break of a well-established trendline may hint at a potential shift in trend.
3. Support and resistance
- These are price levels where the stock may pause or reverse direction.
- Support is where the price tends to bounce back up (buyers step in). Resistance is where the price often struggles to move higher (as sellers pressure may increase).
- Traders look for breakouts above resistance or bounces from support to help time their entry and exit decisions.
Passive investors vs. position traders
Both passive investors and positional traders hold stocks for longer durations. However, there are some key differences in their approach:
| Aspect | Passive Investors | Position Traders |
| Investment approach | Invest regularly (such as through SIPs in mutual funds) | Select stocks based on price trends and market analysis |
| Holding behaviour | Typically hold investments for long periods and may sell based on financial goals | Actively track trends and decide when to sell |
| Market involvement | May not actively track market movements on a regular basis | Actively monitor market trends and price movements |
| Objective | Focus on long-term wealth creation | Aim to benefit from potential price movements over a specific period |
Advantages of position trading
Clearly understanding the pros and cons of positional trading can help you decide if this approach may be suitable for you. The following are some advantages:
- Less time consuming: You don’t have to watch the market every minute, as is the case with day traders.
- Fewer trades: Fewer trades may help reduce overall brokerage fees and taxes.
- Potential for higher profits per trade: Larger price movements translate into potentially higher gains.
- Less emotional pressure: It may be easier to stay calm and make rational decisions compared to day trading.
- Fits busy schedules: Perfect if you have limited time to monitor markets.
- Trading signals: You trade based on clear broader market trends and not temporary price swings.
Read Also: What is Intraday Trading? Meaning, Types and Benefits
Limitations of position trading
While positional trading has clear advantages, learning about the limitations of position trading is equally important:
- More patience required: You may need to wait longer for potential profits, as it does not typically result in quick gains.
- Risk of trend reversals: Sudden market events or news may impact long-term trends quickly.
- Higher capital requirement: Holding stocks for longer periods may require capital to stay invested for extended periods.
- Potential missed opportunities: While holding a stock, you might miss other short-term profitable trades.
Positional stock trading strategies
Here are some simple positional trading strategies:
1. Trend-following strategy
- Identify clear market trends using moving averages.
- Consider buying when prices stay above the moving average.
- Consider selling when prices fall below the moving average.
2. Breakout trading
- Wait for the price to break through resistance (upwards) or support (downwards).
- Consider buying stocks that breakout above a resistance level.
- Consider selling or short stocks breaking below support.
3. Pullback trading
- Consider buying stocks during temporary price drops within an overall uptrend.
- Allows you to buy strong stocks at discounted prices.
- Confirm the trend clearly before trading.
4. Using fundamental analysis
- Positional traders may often pick fundamentally strong companies.
- Analyse the financial health, earnings growth, and industry position.
- Strong fundamentals may increase confidence for longer holding periods.
Potential downsides of positional trading
It’s also important to acknowledge a few potential downsides of positional trading:
- Unexpected market events: Sudden events may negatively impact your position.
- Long-term commitment: Your money stays invested for longer, which may limit liquidity to some extent.
- Requires discipline: Holding positions long-term may be emotionally challenging, especially during market downturns.
How to trade using positional trading strategies
Here’s a simple step-by-step way to start positional trading:
Step 1: Choose strong stocks that seem to be trending upwards according to data, indicators and research.
Step 2: Determine potential entry points (using support, resistance, moving averages).
Step 3: Set target prices and stop-loss clearly.
Step 4: Buy the stock and patiently hold it until your target price or trend changes.
Step 5: Review your trades regularly without the need for constant monitoring.
While positional trading may offer opportunities for relatively active investors, those looking for a more hands-off, long-term approach often consider mutual funds where professional fund managers do the heavy lifting of analysis and stock selection for you.
Conclusion
Clearly understanding the meaning, key strategies and pros and cons of positional trading can help you make strategic trading decisions. Positional trading may be considered as a suitable alternative to day trading. Alternatively, mutual funds offer access to these and other sophisticated trading and investing strategies to new investors. Investment decisions are handled by investment professionals based on thorough knowledge, analysis and research.
FAQs
What is positional in trading with an example?
Positional trading means buying a stock and holding it for a longer period. For example, you could purchase a stock at the price of Rs. 2200 expecting it to potentially reach Rs. 2600 over a period of six months.
Which is better, position trading or intraday trading?
Position trading may be more suitable if you prefer less stress, fewer trades, and higher potential profits over a longer period. Intraday trading may offer opportunities for quicker gains but it requires constant monitoring and carries more risk.
Which stock is most suitable for positional trading?
Stocks showing a clear long-term trend and strong fundamentals, like large cap companies may be suitable for positional trading.
What is positional vs. swing trading?
Positional trading means holding stocks for weeks, months, or even years, focusing on bigger price moves. Swing trading involves shorter periods (days or weeks) and smaller price moves.
What is the meaning of position in the stock market?
A “position” simply means owning a stock (long position) or short selling it (short position). Positional trading involves maintaining these positions for extended periods to profit from price movements.
Is positional trading profitable?
Positional trading may offer profit potential depending on market conditions, stock selection, and timing, but returns are not guaranteed and involve risk.
Which timeframe is best for positional trading?
There is no fixed timeframe for positional trading, as it can vary based on strategy and market conditions; however, positions are typically held for several weeks to several months or longer.
