Position trading is a long-term trading strategy that involves buying an investment with the expectation that it will appreciate over time. Position traders are less concerned with short-term fluctuations in price and news of the day unless they alter the trader’s long-term view of the position. They hold their positions for an extended period, typically weeks, or months, to achieve profit from the price movements of an asset.
Understanding position traders
Position traders are trend followers who identify a trend and an investment that will benefit from it, then buy and hold the investment until the trend peaks. They rely on macroeconomic factors, general market trends, and historical price patterns to select investments that they believe are about to go higher.
A distinction can be made between position traders and buy-and-hold investors, who are classified as passive investors and hold their positions for even longer periods than do position traders. The buy-and-hold investor is building a portfolio of assets for a long-term goal, such as retirement. The position trader has spotted a trend, made a buy based on that trend, and is waiting for it to peak in order to sell. This trading philosophy seeks to exploit the bulk of a trend’s upwards move. As such, it is the polar opposite of day trading, which seeks to take advantage of short-term market fluctuations. In between these two are the swing traders, who might hold an investment for a few weeks or months because they believe it will soon see a price pop.
How is the trend identified?
Identifying a trend is a crucial aspect of successful position trading. Traders employ various technical analysis tools and strategies to recognise potential trends and make informed decisions about when to enter or exit a position. Here are some common methods used in identifying trends:
- Support and resistance:
Support and resistance levels are key indicators in technical analysis. Support is the price level at which a stock or market tends to stop falling, while resistance is the price level at which it often stops rising. By identifying these levels on a price chart, position traders can gain insights into potential trend reversals or continuations.
Traders may look for a stock that consistently bounces off a support level, indicating a potential upward trend, or encounters resistance, suggesting a possible downward trend. Recognising these levels helps position traders make informed decisions about when to enter or exit a position.
- Breakout strategy:
Breakout trading involves identifying key levels of support or resistance and anticipating a significant price movement when these levels are breached. Traders often use chart patterns, such as triangles or rectangles, to identify potential breakouts. When a stock price breaks above a resistance level or below a support level, it may indicate the beginning of a new trend, and position traders may take advantage of this momentum.
- Range trading:
Range trading is a strategy that involves identifying price levels where a stock or market tends to trade within a certain range. Position traders may buy near the lower boundary of the range and sell near the upper boundary. This approach is effective in sideways or consolidating markets, where the price fluctuates within a defined range.
- Moving averages:
Moving averages are commonly used to smooth out price data and identify the underlying trend. Position traders often look at long-term moving averages, such as the 50-day or 200-day moving average, to determine the overall direction of the market. A bullish crossover (a short-term moving average crossing above a long-term moving average) may signal an upward trend, while a bearish crossover may indicate a potential downward trend.
- Fibonacci retracement:
Fibonacci retracement levels are based on the mathematical ratios identified by the Fibonacci sequence. Traders use these levels to identify potential reversal points in a trend. After a significant price movement, a retracement to key Fibonacci levels may suggest a continuation of the trend. Position traders can use Fibonacci retracement to identify entry points in the direction of the overall trend.
Passive investors vs. position traders
Criteria |
Passive investors |
Position traders |
Investment approach |
Long-term, buy-and-hold strategy. |
Long-term, actively manage positions. |
Time horizon |
Very long-term (years to decades). |
Long-term (weeks to months). |
Market involvement |
Less active in trading decisions. |
Actively monitor and manage trades. |
Goal |
Capital appreciation over time. |
Profit from short to medium-term price movements. |
Reaction to market fluctuations |
Tolerant of short-term volatility. |
May capitalise on short-term price movements, but not focused on daily fluctuations. |
Involvement in decision-making |
Minimal involvement once positions are established. |
Actively make decisions based on market trends and analysis. |
Risk tolerance |
Generally higher risk tolerance is due to long-term perspective. |
Must manage risk actively; may use stop-loss orders. |
Trading frequency |
Infrequent trading; buy and hold. |
Less frequent than day trading but more active than passive investing. |
Strategy |
Diversification and patience are key. |
Identify and capitalise on trends; may use technical analysis. |
Emphasis on trends |
Passive; less concerned with short-term trends. |
Actively seeks and capitalises on medium to long-term trends. |
Monitoring |
Limited monitoring and intervention. |
Regularly monitor positions and market conditions. |
Examples |
Index fund investors, retirement portfolio holders. |
Trend followers, breakout traders. |
Advantages of position trading
- Reduced stress: Position traders are less affected by short-term market fluctuations, reducing the stress associated with constant monitoring and rapid decision-making.
- Time efficiency: Position trading requires less time commitment than day trading, making it suitable for individuals with busy schedules or those who prefer a more relaxed approach to trading.
- Potential for significant gains: By holding positions for weeks or months, position traders aim to capitalise on major trends, potentially achieving significant profits when trends play out in their favour.
- Less transaction costs: Position traders typically execute fewer trades than day traders, leading to lower transaction costs over time.
- Utilises fundamental and technical analysis: Position traders often combine both fundamental and technical analysis, allowing for a comprehensive assessment of investment opportunities.
Disadvantages of position trading
- Market exposure: Positions are held for extended periods, exposing traders to market risks and uncertainties that may emerge over time.
- Requires patience: Success in position trading relies on patience, as waiting for a trend to develop and mature is a fundamental aspect of the strategy.
- Potential for drawdowns: Extended holding periods mean that positions may experience drawdowns before trends materialise, testing the trader's confidence and discipline.
- Limited profit opportunities: While position trading can yield significant profits, the approach may not capture the quick gains that day traders seek during short-term market fluctuations.
- Emotional challenges: Traders may face emotional challenges when managing positions over extended periods, especially if the market behaves unexpectedly or contrary to initial expectations.
Conclusion
To be successful, a position trader has to identify the right entry and exit prices for the asset and have a plan in place to control risk, usually via a stop-loss level. A significant advantage of position trading is that it does not take much time. Once a trade has been initiated and safeguards have been implemented, it is a matter of waiting for the desired outcome. The main risk is that minor fluctuations that a trader chooses to ignore can unexpectedly turn into trend reversals. Another drawback is that it ties up money for a prolonged period of time, possibly causing opportunity costs. Traders should carefully consider their risk tolerance and investment goals before adopting a position trading strategy.
